Rolls Royce shares on firmer ground despite dividend slash

It looks like Rolls-Royce’s recently installed CEO Warren East may have missed a trick.

The global airplane engine maker No. 2 could have reported almost anything on the negative side with its finals on Friday, so long as it included the magic words: “no rights issue.”

Halving the final 2015 dividend and placing the 2016 interim one under review, CFO David Smith said “we don’t need to look at a rights issue”.

Don’t look

Well, he probably did look, but paying shareholders £130m instead of £260m—a bigger final div cut to 7.1p from 14.1p than expected—buys some time.

Recognition by Mr East of the importance of “healthy” returns, helped.

Rolls has after all stuck substantially to guidance.

This is a relief for investors after five profit warnings in two years.

The upshot: RR’s biggest one-day jump for at least 12 years.

The stock extended gains further at the time of writing to about 15%, even as a strong oil-price fuelled relief rally across Europe seemed to be ticking back a bit.

Stronger Rolls shares—albeit after tumbling as much as 40% in 2015—signified the return of some investor conviction.

Or at least that East’s campaign for time to streamline Rolls into a more efficient growth engine was gaining traction.

• More management jobs are to be cut, on top of recent 20% reduction
• £150m-£200m in savings annually

Firmer ground; higher ceiling?

Improving shareholder confidence may be even more telling given that Rolls-Royce stuck to $650m 2016 profit guidance.

That’s worse than -50% on-year $673m market forecast.

The disparity suggests sensible caution, affording additional leeway, if required, for RR’s marine and energy-facing businesses, as oil prices show little sign of sustained recovery.

But if as East said, his plans are working, and that the group is “on firmer ground with this than we were in the middle of last year, than indeed than we were in November”, room may have been made for improved guidance.

Should better forecasts become official, Rolls-Royce shares may completely close the gap from 17th November, which saw aggressive selling to lows that persisted until Thursday.

Friday’s jump cleared 50% of the fall on that day in November, bringing the stock close to the same resistance (625p) at which it failed later in December.

RR also looks to have conquered a worrisome descending trend from May 2015.

Progress beyond a cluster of potential challenges derived from 61.8% of the slide in November, and the gap close at 661p, would be good evidence that a turnaround was in play.

If these hopes are too early, shareholders can hope for support at 597p, the base of the late-November resistance zone.

Or if that fails, they should expect a re-test of the long-standing 504p low.

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