LONDON—Rolls-Royce Holdings PLC on Friday slashed its full-year dividend 39%, the first cut in its shareholder payment since 1992, amid a sustained slump in full-year earnings that is poised to stretch into a third year.

Rolls-Royce proposed a full-year dividend of 14.1 pence, down from 23.1 pence in the prior year. The final payment to shareholders was cut 50% to 7.1 pence from 14.1 pence. It marks only the second dividend cut for the company since it was privatized in 1987 and is a bigger hit than analysts had expected. The dividend payout for the first half of this year will also be halved.

"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. He acknowledged the need for a "healthy" dividend and pledged to "review the payment so that it will be rebuilt over time to an appropriate level."

Rolls-Royce's closely watched underlying profit before tax, which excludes changes in the value of currency hedges, fell to £ 1.4 billion ($2 billion) last year following an 8% retreat in 2014. Underlying sales declined 1% to £ 13.4 billion.

Rolls-Royce, which makes engines for Boeing Co. and Airbus Group SE long-range jetliners, has seen demand soften for some of its most profitable products. The sharp drop in oil prices also has hit earnings at its marine and power systems operations.

The company left its guidance unchanged after warning in November that profit this year would face a £ 650 million headwind. Sales this year will be "marginally lower" this year on a constant currency basis, it said.

"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 of the company's top executives. Shares in Rolls-Royce have tumbled about 40% since he joined.

Rolls-Royce has embarked on a restructuring program, seeking to generate £ 150 million to £ 200 million in annual savings from 2017, which includes pruning management and other changes. The company on Friday said it would take an exceptional restructuring charge of £ 75 million to £ 100m in 2016 to pay for those measures.

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, adding pressure on management to turn around the company's prospects.

Neil Woodford, a highly regarded 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.

Write to Robert Wall at robert.wall@wsj.com

 

(END) Dow Jones Newswires

February 12, 2016 03:45 ET (08:45 GMT)

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