Rolls-Royce Cuts Longstanding Dividend

   (FROM THE WALL STREET JOURNAL 2/13/16) 
   By Robert Wall 

LONDON -- Rolls-Royce Holdings PLC on Friday cut its dividend for the first time since 1992 on slumping profit, though the British engine maker hinted a turnaround would gain traction this year.

"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, in explaining a 39% cut to the annual shareholder payout.

Rolls-Royce, which makes engines for Boeing Co. and Airbus Group SE long-range jetliners, has seen demand weaken 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 were worried the company would pursue a rights issue to shore up its balance sheet and cut its financial outlook once again.

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 could decline by roughly GBP 650 million ($942 million) -- and said sales this year will be "marginally lower" this year on a constant-currency basis. Mr. East also said the further deterioration in the oil markets since the company last issued guidance hasn't worsened already depressed prospects for the business.

Management also suggested a turning point lies ahead after two years of earnings missteps. "In my view 2016 is where we start transitioning from dealing with a lot of legacy issues to getting ahead of the curve," Mr. Smith said.

Rolls-Royce shares jumped 14% in London trading on Friday, the stock's biggest daily gain since 2008.

Still, earnings are expected to remain depressed for the near future, as the company on Friday said its closely watched underlying profit before tax, which excludes items such as changes in the value of currency hedges, fell 12% to GBP 1.4 billion last year, following an 8% retreat in 2014. Underlying sales declined 1% to GBP 13.4 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 top executives. Shares have tumbled about 40% since he joined.

Rolls-Royce has embarked on a restructuring program, seeking to generate GBP 150 million to GBP 200 million in annual savings from 2017. 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 GBP 75 million to GBP 100 million in 2016 to pay for those measures. Mr. Smith said a smaller charge is expected in the future to pay for the remainder of the program. More savings in 2017 are being sought, the company said.

Under the job-cutting push, 2,800 people had left the company by the end of last year, with another 800 set to depart in 2016. Savings from those cuts in the company's aerospace and marine businesses have yielded around GBP 145 million in annual savings.

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.

Neil Woodford, a 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 would continue to study 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 asset sales.

He said he was "more optimistic" about the prospects for the company's power-system operations that were considered a potential disposal candidate, while acknowledging there were elements in the marine unit that may not be a good fit.

Rolls-Royce proposed a dividend payment for 2015 of 14.1 pence, down from 23.1 pence in the prior year, as it halved its final payment to 7.1 pence. The dividend payout for the first half of this year will also be halved.

(END) Dow Jones Newswires

February 13, 2016 02:48 ET (07:48 GMT)

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