If you’re one of those investors who took a chance on Rolls-Royce (LSE:RR) shares when they traded for around 60p, this year you’d receive around 13% of your original investment as dividends. That’s a phenomenal bonus to complement the 1,100% share price appreciation since then.
Reintroduction of dividends
After a five-year hiatus, Rolls-Royce is reinstating dividends. This marks a significant milestone in its turnaround. The company announced a 6p per share payout, amounting to £500m, to be distributed in June 2025. This decision follows a stellar 2024 performance, with operating profits surging 55% to £2.5bn and free cash flow nearly doubling to £2.4bn.
Additionally, Rolls-Royce has launched a £1bn share buyback programme, returning a total of £1.5bn to shareholders. CEO Tufan Erginbilgic emphasised the firm’s transformation into a high-performing, resilient business, driven by strong results across all core divisions.
Looking forward, Rolls-Royce’s dividend outlook is promising, with analysts forecasting steady growth. The payout is expected to rise from 6p in 2025 to 7.8p in 2026 and 9.01p in 2027, reflecting annual increases of 30% and 16%, respectively. The company aims to distribute 30%-40% of underlying pre-tax profits as dividends, supported by robust earnings growth.
Pre-tax profit is projected to reach £2.86bn in 2025 and £3.18bn by 2027. However, the dividend yield remains modest at under 1% at the current price, reflecting the stock’s recent rally. Despite this, Rolls-Royce’s improving cash flow and profitability underpin its long-term dividend potential.
Riding the volatility
President Trump’s tariffs will potentially create considerable challenges for Rolls-Royce. As a major exporter of aircraft engines and power systems, the company relies heavily on global supply chains and international trade.
The tariffs, including a levy on British exports to the US are driving up production costs and disrupting operations. In theory, the tariffs would make a UK company less competitive in the US market.
However, it’s important to note that while 31% of the company’s sales are in the US, 30% of its manufacturing capacity is in the States too. This should mitigate some of the impact.
The bottom line
I’m going to start by saying that I wouldn’t buy Rolls-Royce stock today for the dividends in the near term. However, I’d highlight that this is a business that’s booming, and moderate dividend increases over time can really add up. Just look at the example of Warren Buffett and Coca-Cola — he now receives around a 60% yield based on the value of his first investments. That’s something to think about.
More generally, Rolls-Royce has benefitted from strong demand for long-haul travel and defence contracts, with projected operating margins of 13%-15% by 2027. Rolls-Royce’s strategic focus on cash flow generation and cost-cutting positions has also made it more resilient.
However, risks are now elevated. Trump’s tariffs threaten supply chain stability, could inflate production costs and damage air travel demand. Right now, I’m just watching the volatility from a distance. I don’t expect to add to my holdings right away even at this slightly more attractive 25 times earnings.
