The large army of retail shareholders in Rolls-Royce (LSE: RR) used to benefit from a regular flow of dividends. But the Rolls-Royce dividend is a thing of the past, for now at least.
The shareholder payout was cancelled during the pandemic and has not yet made a comeback.
I do think that comeback will happen. But when?
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Radio silence
Rolls-Royce’s annual results last week were strong. The company swung from a £1.5bn loss before tax to a £2.4bn profit.
There was a lot to like about the results from an investment perspective.
But one thing was missing – any mention whatsoever of the Rolls-Royce dividend being restarted.
Not only was the dividend not discussed, there was zero discussion of the company’s thinking when it comes to any future such payouts.
That strikes me as unhelpful.
The business is increasingly on the front foot and generating sizeable free cash flows. I therefore think its leadership ought to be clearer about how it views the prospects for dividends, even if it has no immediate plans to pay them.
Cash to spare
Over time, I think the argument in favour of restarting the Rolls-Royce dividend will become stronger.
If the business continues to generate sizeable free cash flows, it will need to do something with them. Saving them for a rainy day or funding acquisitions are possible uses, but so too are share buybacks and dividends.
At some point, if there is enough free cash flowing, I expect that the company will come under growing pressure either to bring back the dividend or explain why not.
For now, a surging share price and lack of dividend mean that many investors are not thinking much about the shareholder payout. That could change, for example, if the share price starts to perform more weakly but the company still generates sizeable free cash flows.
If business continues to improve and the company hits its ambitious medium-term cash flow targets, I expect the Rolls-Royce dividend will be restored.
No timeline in sight
For now, however, I have no idea when that might be.
Given the lack of any discussion on this topic in the annual report, it seems safe to assume that it is a low priority right now for management.
Not only that, but I think any future restoration of the Rolls-Royce dividend relies on business performance. The company’s targets are just that – it now needs to achieve them, which is not guaranteed to happen.
We have seen in the past that a sudden unexpected event outside the company’s control can hit demand for its products and services, as during the pandemic. That is an ongoing risk.
I expect the dividend to come back but likely not for some years. So I would not factor that expectation now into any consideration of whether to add the shares back into my portfolio.
