A return to profit will not be the cue for Rolls-Royce to restore a meaningful dividend.
The aircraft engine maker beat City expectations yesterday with a pre-tax profit of £1.9 billion for the first six months of the year, a strak contrast to a £2.2 billion loss in the first six months of last year.
However, even though the shares leapt by 10 per cent after the numbers were announced, Warren East, Rolls’ chief executive, said that a “competitive” dividend would be reinstated only once the company had shored up its balance sheet and was generating more cash than it was investing.
He said that Rolls could be generating free cashflow of “about £1 billion by around about 2020”. While Mr East insisted that was not a firm target, he said that it was a precondition for raising the dividend. He scrapped the company’s progressive dividend policy last year.
“It’s a board decision, but we said when we came off we would restore the dividend at competitive levels subject to short-term cash requirements,” Mr East said. “Right now, strengthening the balance sheet is more of a short-term requirement. What we don’t want to do is restore the dividend to a competitive level and then cut it back again.” He added that free cashflow would be a “lead indicator” for the return of the payout. The interim dividend was retained at 4.6p. Two years ago the interim dividend was twice that.
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The civil aerospace division, which makes jet engines for airliners, was the top performer after a 27 per cent rise in large engine deliveries. Overall revenue climbed 12 per cent to £7.6 billion.
The company slumped to a pre-tax loss of £4.6 billion last year, driven by a £4.4 billion writedown caused by the collapse of the pound since the Brexit vote, as well as a £671 million penalty to settle bribery allegations.
The update sent Rolls shares up 91p to 979p. The company said that the performance was ahead of its own expectations but that it was maintaining its outlook for 2017 as a whole.
Mr East was appointed in 2015 to put Rolls back on track after a succession of profit warnings and an investigation by the Serious Fraud Office. He said the results showed that the company was heading in the right direction, but added that there was “no room for complacency”.
The strong performance by the civil aerospace business more than made up for a flagging defence division, which is suffering from the pressure on government budgets. Civil revenue rose 14 per cent to £3.7 billion, while defence aerospace dipped 4 per cent to £1.1 billion. Its nuclear unit also recorded a solid performance, with revenues rising 8 per cent to £391 million for the half-year. Research and development spending rose to £411 million over the six-month period, up from £378 million last year.
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Rolls spooked investors this week by warning that they should not take its ambition to generate £1 billion of free cashflow by 2020 too literally. In the first half free cashflow, the cash generated by the business left over after investments are accounted for, was a £331 million deficit.
It said cashflow performance had been better than expected, but higher engine production had dragged the figure down and capital expenditure had been greater than expected.