Rolls-Royce Cuts Dividend as Full-Year Profit Falls -- 2nd Update
February 12 2016 - 4:13AM
Dow Jones News
By Robert Wall
LONDON-- Rolls-Royce Holdings PLC on Friday slashed its
full-year dividend 39%, the first cut in its shareholder payment
since 1992, though investors embraced the lack of further bad news
sending shares higher.
Rolls-Royce proposed a full-year dividend of 14.1 pence, down
from 23.1 pence in the prior year. The final payment to
shareholders was cut 50% to 7.1 pence from 14.1 pence. It marks
only the second dividend cut for the company since it was
privatized in 1987. The dividend payout for the first half of this
year will also be halved.
"We need to sustain a healthy balance sheet to ensure we have
the financial flexibility to maintain a strong investment grade
credit rating," Chief Executive Warren East said. He acknowledged
the need for a "healthy" dividend and pledged to "review the
payment so that it will be rebuilt over time to an appropriate
level." An upward adjustment could come with the review of the 2016
final payment "subject to short-term cash needs."
Rolls-Royce, which makes engines for Boeing Co. and Airbus Group
SE long-range jetliners, has seen demand soften for some of its
most profitable products. The sharp drop in oil prices also has hit
earnings at its marine and power systems operations.
Some investors worried the company would require a rights issue
to shore up its balance sheet and further cut its financial outlook
after a series of profit warnings in the past two years.
Rolls-Royce management allayed those concerns.
Chief Financial Officer David Smith said the company had boosted
its cash and liquidity position. "We don't need to look at a rights
issue," he said.
The company also left its guidance unchanged after warning in
November that profit this year would face a GBP650 million ($942
million) headwind. Sales this year will be "marginally lower" this
year on a constant currency basis, it said. The further
deterioration in the oil markets since the company last issued
guidance hasn't changed already depressed prospects for the
business, Mr. East said.
Investors reacted positively, sending shares up more than 12% in
early London trading, the most since 2008.
Still, earnings are expected to remain depressed for the near
future after the company's closely watched underlying profit before
tax, which excludes changes in the value of currency hedges, fell
to GBP1.4 billion ($2 billion) last year, following an 8% retreat
in 2014. Underlying sales declined 1% to GBP13.4 billion.
"Despite steady market conditions for most of our businesses it
will be a challenging year as we start to transition products and
sustain investment in Civil Aerospace and tackle weak offshore
markets in Marine, " Mr. East said.
Mr. East took the top job at Rolls-Royce in July. Since then, he
has issued two profit warnings and announced further job cuts,
including the departure of two of the company's top executives.
Shares in Rolls-Royce have tumbled about 40% since he joined.
Rolls-Royce has embarked on a restructuring program, seeking to
generate GBP150 million to GBP200 million in annual savings from
2017, which includes pruning management and other changes. Mr. East
said about half those savings have been identified, including the
departure of about 50 of 200 top managers.
The company on Friday said it would take an exceptional
restructuring charge of GBP75 million to GBP100 million in 2016 to
pay for those measures. Mr. Smith said a low charge is expected in
the future to pay for the remainder of the program.
Rolls-Royce faces investor pressure to act. U.S. activist
investor ValueAct Capital Management LP has become Rolls-Royce's
largest shareholder and is seeking a board seat, adding pressure on
management to turn around the company's prospects.
Neil Woodford, a highly regarded British investment fund manager
who held Rolls-Royce stock for almost a decade, last year said he
lacked confidence in the engine maker's near-term prospects as he
announced his CF Woodford Equity Income Fund and the Woodford
Patient Capital Trust fund had sold their shares.
Mr. East said Friday that the company was continuing its review
of how to restructure the business. That includes an assessment of
potential portfolio changes, first signaled last year, though the
company has said it isn't exploring major disposals.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
February 12, 2016 03:58 ET (08:58 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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