Rolls-Royce shares “on firmer ground” despite dividend slash

<p>It looks like Rolls-Royce’s recently installed CEO Warren East may have missed a trick. The global airplane engine maker No. 2 could have reported almost […]</p>

It looks like Rolls-Royce’s recently installed CEO Warren East may have missed a trick.

The global airplane engine maker No. 2 could have reported almost anything on the negative side with its finals on Friday, so long as it included the magic words: “no rights issue.”

Halving the final 2015 dividend and placing the 2016 interim one under review, CFO David Smith said “we don’t need to look at a rights issue”.

 

 

Don’t look

Well, he probably did look, but paying shareholders £130m instead of £260m—a bigger final div cut to 7.1p from 14.1p than expected—buys some time.

Recognition by Mr East of the importance of “healthy” returns, helped.

Rolls has after all stuck substantially to guidance.

This is a relief for investors after five profit warnings in two years.

The upshot: RR’s biggest one-day jump for at least 12 years.

The stock extended gains further at the time of writing to about 15%, even as a strong oil-price fuelled relief rally across Europe seemed to be ticking back a bit.

Stronger Rolls shares—albeit after tumbling as much as 40% in 2015—signified the return of some investor conviction.

Or at least that East’s campaign for time to streamline Rolls into a more efficient growth engine was gaining traction.

 

  • More management jobs are to be cut, on top of recent 20% reduction
  • £150m-£200m in savings annually

 

 

Firmer ground; higher ceiling?

Improving shareholder confidence may be even more telling given that Rolls-Royce stuck to $650m 2016 profit guidance.

That’s worse than -50% on-year $673m market forecast.

The disparity suggests sensible caution, affording additional leeway, if required, for RR’s marine and energy-facing businesses, as oil prices show little sign of sustained recovery.

But if as East said, his plans are working, and that the group is “on firmer ground with this than we were in the middle of last year, than indeed than we were in November”, room may have been made for improved guidance.

 

 

 

Should better forecasts become official, Rolls-Royce shares may completely close the gap from 17th November, which saw aggressive selling to lows that persisted until Thursday.

Friday’s jump cleared 50% of the fall on that day in November, bringing the stock close to the same resistance (625p) at which it failed later in December.

RR also looks to have conquered a worrisome descending trend from May 2015.

Progress beyond a cluster of potential challenges derived from 61.8% of the slide in November, and the gap close at 661p, would be good evidence that a turnaround was in play.

If these hopes are too early, shareholders can hope for support at 597p, the base of the late-November resistance zone.

Or if that fails, they should expect a re-test of the long-standing 504p low.

 

 

DAILY CHART

ROLLS ROYCE DAILY CHART 12TH FEB 2016

 

Please click image to enlarge

 

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.