Careful stewardship of cash or inexplicable hoarding?
The stockmarket appeared to incline towards the latter view today on discovering that Rolls-Royce has decided to increase its payments to shareholders by 35 per cent through dividend payments rather than an anticipated £500 million through a special dividend. The shares fell 9 per cent in response.
The company’s explanation is that it needs to hold back cash because of uncertain markets and maintain its annual £800 million research and development spend in the face of fierce competition from large rivals — notably General Electric. It is also questionable whether the City had sufficiently scaled down its expectations of a bumper payout since Rolls’ financial review was launched last summer: seven months into a credit crunch, the virtues of a balance sheet laden with cash are now much more apparent.
But perhaps the more worrying implication is that, despite Rolls’ upbeat outlook today, the prospects for the aerospace sector have begun to worsen. Rolls may have a record £46 billion order book but airline profits are now under pressure. Not only has financing new aircraft become more difficult but the risk of a US recession raises the spectre that airlines may begin deferring or even cancelling orders.
Rolls’s ability to generate strong aftermarket sales of spare parts from its massive installed base of engines gives it considerable defensiveness. But by holding on to it cash the company has provided a sharp, perhaps inadvertent, reminder to investors that it remains a fundamentally cyclical business.