Over the past two years, Rolls-Royce (LSE:RR) shares have surged 540%! Just let that sink in. A £10,000 investment during the ill-fated Liz Truss premiership would be worth £64,000 today.
But there’s a little more good news for Rolls-Royce shareholders, and it means investors don’t need to sell their shares to realise their returns on the stock.
In the company’s results for the first half of the year, management said it was looking to reinstate its dividend with more information to be shared in the full-year results.
So, what could this dividend look like?
The dividend forecast
Rolls-Royce hasn’t paid a dividend for four years, so investors shouldn’t expect anything too exciting from the civil aviation and defence giant.
Based on analysts’ projections, the forecasts are as follows.
2024
2025
2026
Dividend
5.3p
6.3p
8.1p
Dividend yield
1.1%
1.27%
1.63%
EPS
17p
19.6p
22.6p
(EPS: Earnings per share)
The forecasts suggest that the dividend will increase modestly throughout the medium term, with a payout ratio of just under 33%. That’s a very safe ratio. And while it’s great to see the dividend return, this yield isn’t groundbreaking.
In short, I wouldn’t expect anyone to go out and buy Rolls-Royce stock for the dividends. However, even a percent or two can contribute to our broader investment goals. It’s certainly nothing to be sniffed at.
What about the business as a whole?
As the EPS forecasts suggest, Rolls-Royce is a business experiencing significant earnings growth. Two years ago, this would have seemed almost impossible to some investors and analysts — the company really seemed down and out.
Under new management, Rolls-Royce has become a much leaner and more profitable beast. And these changes have been complemented by supportive trends in civil aviation and defence. This is evidenced by recent results. In 2023, the group’s return on capital more than doubled, reaching 11.3%, while net debt decreased to £2bn, down from £3.3bn at the close of 2022.
In civil aviation, Rolls-Royce reported that long-term service agreement large engine flying hours (EFH) have returned to 100% of 2019 levels in the four months to April 30, 2024, driven by the continued recovery of international traffic in Asia and Rolls-Royce’s growing fleet. The company has also secured new widebody business wins, including orders from VietJet, Starlux, and IndiGo.
Meanwhile, Vladimir Putin’s war in Ukraine has seen governments around the world commit to new military procurement programmes. As a major supplier of propulsion systems for the sector, the company has registered an uptick in demand.
What’s the drawback?
Like any investment, there’s always a risk. Some investors, and a small minority of analysts, are concerned that the stock is simply getting too expensive. At 30 times forward earnings, it’s not cheap compared to the FTSE 100 average — around 13 times.
Investors are putting a lot of emphasis on the stock’s growth potential. If earnings growth starts to slow, the stock could plummet.
However, noting the price-to-earnings growth ratio of 1.03 and the incredible moat, I’m still bullish on Rolls-Royce, as are many analysts.
The post Here’s the dividend forecast for Rolls-Royce shares appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
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James Fox has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
