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In 2023, Rolls-Royce (LSE:RR.) shares were the best performer in the FTSE 100. As a result, there has been much speculation about whether the rally can continue. But as an income investor, what interests me most is the dividend forecast.
The company last paid a dividend (4.6 shares annually) in January 2020. It was an interim payment, just before the global aviation industry was devastated by the pandemic.
The good oldie times
Not long ago, investors held onto stocks for their generous payouts rather than their growth potential.
For example, in 2015 it paid shareholders 23.1p.
At the end of that year, the share price was 197p, around a third less than today. His shares were yielding almost 12%.
But things have changed since then.
To survive Covid, Rolls-Royce had to raise some cash. Part of its fundraising involved issuing new shares.
The engineering giant now has 8.417 million shares outstanding. At the end of 2015, the figure was 1,838 million. And this huge increase has important implications for dividend forecasts.
In 2015, the dividend cost around £425m.
Today, it would require cash worth £1.94bn.
That's almost double the company's expected 2023 free cash flow of £1bn. A payment of this level is clearly not sustainable.
Expert opinion
Rolls-Royce regularly surveys the analysts who cover its stock. The average (median) forecast for the dividend, with respect to its 2023 financial year, is zero.
This is not surprising given that some of its loan covenants prevent it from making distributions to shareholders.
However, if the 'experts' are correct, the company will pay a dividend for its 2024 financial year of 1.8p, at a cost of approximately £152m.
This implies a paltry current yield of 0.6%; the FTSE 100 average is 3.9%.
Most positively, a profitability of 4p is expected by 2025. This would cost the company around £337m.
The most optimistic forecast is 4.9p and 6.7p, in 2024 and 2025, respectively. Although I should note that at least one analyst is not expecting any payouts for any of these years.
different times
It seems to me that the days of Rolls-Royce shares offering double-digit returns are long gone. And it is unlikely to be repeated.
This is due to the large increase in the number of shares outstanding.
Even if the company returned the same amount to shareholders as in 2015 (£425m), the dividend per share would only be 5p. This would give a current yield of 1.7%.
By 2024, the company is expected to post earnings before interest and tax of £1.7bn, up from £1.5bn in 2015.
Although its financial performance is likely to be better than nine years ago, its dividend is expected to be much lower.
I'm sure that's why very few investors seem to be discussing Rolls-Royce's dividend forecast. When it is finally restored, it doesn't look like the return to shareholders will be big enough to excite anyone.
