RYCEY Rolls Royce Holdings PLC (PK)

By Robert Wall 

LONDON-- Rolls-Royce Holdings PLC on Friday slashed its full-year dividend 39%, the first cut in its shareholder payment since 1992, though investors embraced the lack of further bad news sending shares higher.

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. 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." An upward adjustment could come with the review of the 2016 final payment "subject to short-term cash needs."

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.

Some investors worried the company would require a rights issue to shore up its balance sheet and further cut its financial outlook after a series of profit warnings in the past two years. Rolls-Royce management allayed those concerns.

Chief Financial Officer David Smith said the company had boosted its cash and liquidity position. "We don't need to look at a rights issue," he said.

The company also left its guidance unchanged after warning in November that profit this year would face a GBP650 million ($942 million) headwind. Sales this year will be "marginally lower" this year on a constant currency basis, it said. The further deterioration in the oil markets since the company last issued guidance hasn't changed already depressed prospects for the business, Mr. East said.

Investors reacted positively, sending shares up more than 12% in early London trading, the most since 2008.

Still, earnings are expected to remain depressed for the near future after the company's closely watched underlying profit before tax, which excludes changes in the value of currency hedges, fell to GBP1.4 billion ($2 billion) last year, following an 8% retreat in 2014. Underlying sales declined 1% to GBP13.4 billion.

"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 GBP150 million to GBP200 million in annual savings from 2017, which includes pruning management and other changes. Mr. East said about half those savings have been identified, including the departure of about 50 of 200 top managers.

The company on Friday said it would take an exceptional restructuring charge of GBP75 million to GBP100 million in 2016 to pay for those measures. Mr. Smith said a low charge is expected in the future to pay for the remainder of the program.

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.

Mr. East said Friday that the company was continuing its review of how to restructure the business. That includes an assessment of potential portfolio changes, first signaled last year, though the company has said it isn't exploring major disposals.

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

(END) Dow Jones Newswires

February 12, 2016 03:58 ET (08:58 GMT)

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