Rolls Royce cuts dividend, shares surge

You know things have been pretty bad when a dividend cut sees a stock’s shares jump 13%.

Rolls Royce cuts dividend, shares surge
2 minutes

Cost cutting

He also highlighted the firm’s cost reduction and streamlining plans, designed to help alleviate some of that pressure.

“Our target is to deliver incremental gross cost savings of between £150m and £200m per annum, with the full benefits accruing from the end of 2017 onwards.

“In the last two months we have already announced a 20% reduction in top two layers of senior management and further reductions planned for 2016 and onwards. This has included removal of the divisional structure. To date we have already identified around 50%, or £75-100m, of targeted cost savings with a related exceptional restructuring charge of £75-100m which will be taken in 2016. Around £30-50m of the initial savings should be achieved in 2016 with the full run rate benefiting 2017.

In a flash note out ahead of the earnings presentation, Investec said, however, that while the results were better than reduced expectations, this was largely due to a series of one-off adjustments, including: a £189m benefit in commercial aerospace for long-term contract accounting, a £40m benefit in defence aerospace related to changes to scope and contract variations, a £58m intellectual property settlement and a £19m tax credit for research and development in its nuclear division.

As a result, Investec said: “While the initial pages of the statement read positively, there are a series of concerning details in the increased divisional disclosures, including lower H2 order intake in Power Systems and guidance for increased costs at Defence and Nuclear. Our view remains that the premium valuation does not reflect a series of medium and long term challenges to profits and cash.”

Helal Miah, investment research analyst at The Share Centre, is more positive: As a result of the upcoming structural changes, we maintain our ‘buy’ recommendation on the stock. However, investors should be prepared to ride out the volatility that the stock is likely to face as market conditions in aerospace look more uncertain. This may now be a stock for the contrarian investor seeking a balanced return and willing to accept a medium level of risk.”

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