Resilience returns: Rolls-Royce shares surge to a record as new CEO’s fiscal discipline pays dividends

The company said it now expects underlying operating profit of £2.1 billion ($2.7 billion) to £2.3 billion and free cash flow of as much as £2.2 billion, according to a statement on Thursday. Rolls-Royce will also reinstate dividend payments for the full year, starting at a 30% payout ratio of underlying net income and lifting that metric to as much as 40% over time. 

“We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing,” Chief Executive Officer Tufan Erginbilgic said in the statement.

Under Erginbilgic, Rolls-Royce has put greater focus on profitable contracts, sometimes at the frustration of aircraft manufacturing partner Airbus SE, which relies on the engine maker for its A350 and smaller A330neo models. That fiscal discipline has paid off for the biggest UK manufacturer, with the stock more than tripling last year, the CEO’s first year in office, and another 50% gain so far in 2024.

The stock soared as much as 12% in London trading to the highest since Rolls-Royce first started trading as a public company. 

Profit Goals

The company said the supply-chain environment remains difficult, something that Airbus and other aviation manufacturers have also lamented. Rolls-Royce said its cash-flow guidance for the year includes an impact of as much as £200 million from supply-chain issues, something the CEO said might persist for 18-24 months. 

The biggest constraints are in areas like forging and casting, and finding skilled labor is also a problem, Erginbilgic said on a call with journalists. The company has embedded “significant” amounts of its workers at some of its key suppliers to help them improve operations, he said. 

In the first half, underlying operating profit surged 74% to £1.1 billion, helped by higher demand and cost cuts. The gains were most pronounced at the main civil aerospace subsidiary, where the operating margin rose to 18% from 12.4%. Rolls-Royce predicted its efficiency program will generate more than £250 million of cumulative savings by the end of 2024.

The company is also progressing with its disposal program, which Rolls-Royce has said aims to achieve as much as £1.5 billion in gross proceeds by 2028.

The new earnings outlook compares with a previous guidance of operating profit of as much as £2 billion and free cash flow of £1.9 billion at best. The company has a mid-term goal of achieving operating profit of £2.5 billion to £2.8 billion, an operating margin of 13-15%, free cash flow of £2.8 billion to £3.1 billion and return on capital of 16-18% by 2027. 

The CEO said the path toward those targets won’t necessarily be “linear,” given that Rolls-Royce has already achieved a large proportion of those goals. 

At the same time, “if we can deliver them earlier, we will,” Erginbilgic said.