Rolls-Royce Shares Soar 16% On Strong FY Results, Dividend Return

Rolls-Royce Shares Soar as Company Announces Impressive 2024 Results and Dividend Return

Rolls-Royce has made a heavyweight comeback in 2024, sending its shares surging by 15.5% to 729p on the London Stock Exchange. The FTSE 100 giant unveiled robust financial results, including a significant increase in revenues and profits, and announced the resumption of dividend payments for the first time since the Covid-19 pandemic disrupted global air travel. Statutory revenues for the year rose by 14.7% to £18.9 billion, while underlying revenues grew by 15.8% to £17.8 billion. Operating profits also saw a dramatic increase, soaring by 49.5% on a statutory basis (£2.9 billion) and by 55% on an underlying basis (£2.5 billion). The company’s underlying operating margin now stands at 13.8%, a notable improvement from 10.3% in 2023. This strong financial performance has clearly delighted investors, signaling a turning point for a company that has faced significant challenges in recent years.

Dividend Return and Share Buyback Program Announced

As part of its efforts to reward shareholders, Rolls-Royce announced the return of dividend payments after a four-year hiatus. The company will pay a full-year dividend of 6p per share, marking a welcome return to pre-pandemic norms. Additionally, Rolls-Royce revealed a £1 billion share buyback program, which will commence immediately and run through 2025. These moves reflect the company’s improved financial health, driven by strong cash flows and a disciplined focus on profitability. Free cash flow for the year nearly doubled to £2.4 billion, up from £1.3 billion in the previous year. This strong cash generation has enabled Rolls-Royce to move into a net cash position of £475 million, a stark contrast to its net debt of £2 billion just a year ago. The company attributed its robust financial performance to higher operating profits, continued growth in long-term service agreements, and improved working capital management.

CEO Hails Transformation and Raises 2025 Targets

Rolls-Royce CEO Tufan Erginbilgic has lauded the company’s 2024 performance as a testament to its ongoing transformation. Since taking the helm in January 2023, Erginbilgic has overseen a wide-ranging restructuring effort aimed at boosting cash flows, margins, and overall competitiveness. The results, he said, demonstrate progress toward building a "high-performing, competitive, resilient, and growing business." Despite ongoing supply chain challenges, all core divisions delivered significantly improved performance. Looking ahead to 2025, Rolls-Royce has raised its targets, predicting underlying operating profits of between £2.7 billion and £2.9 billion, and free cash flows in the same range. These forecasts are in line with the targets set at the company’s Capital Markets Day, but they are being achieved two years ahead of schedule. Erginbilgic also highlighted that medium-term expectations for underlying operating profit have been increased to £3.6 billion to £3.9 billion, with free cash flows expected to reach £4.2 billion to £4.5 billion.

Market Reaction and Analyst Insights

The positive results and ambitious forecasts have been well-received by analysts and investors alike. Mark Crouch of eToro noted that Rolls-Royce "did not disappoint" in its 2024 performance, with strong gains across both its civil aerospace and defense divisions. The civil aerospace sector, which accounts for over 50% of Rolls-Royce’s business, has seen a significant recovery as airline passenger numbers continue to rise, putting the pandemic-era downturn firmly in the rearview mirror. Crouch also pointed to the strength of the company’s defense division, which is benefiting from increased UK government spending on defense and the expansion of Rolls-Royce’s submarine facilities in Derby. This diversification across both commercial and defense markets positions Rolls-Royce well for sustained growth.

Airline Recovery and Defense Growth Drive Momentum

The recovery in the global airline industry has been a key driver of Rolls-Royce’s success in 2024. As air travel demand continues to rebound, the company has seen a surge in engine orders and flying hours, which has boosted its civil aerospace division. This is particularly important for Rolls-Royce, given that the division accounts for the majority of its revenue. At the same time, the company’s defense business has also performed strongly, driven by increased government spending on defense programs. The UK government’s commitment to expanding its defense capabilities has provided a further boost to Rolls-Royce’s order book, particularly in its submarine and other defense-related projects. This dual-engine growth strategy has enabled Rolls-Royce to balance its exposure to market fluctuations and build a more resilient business model.

Supply Chain Challenges and Future Outlook

While Rolls-Royce’s 2024 results paint a positive picture, the company is not without its challenges. Supply chain disruptions remain a significant headwind, and Rolls-Royce has warned that these issues could impact its 2025 performance, potentially reducing free cash flow by £150 million to £200 million. The company expects supply chain challenges to persist for another 12 to 18 months, requiring continued focus on operational efficiency and cost management. Despite these challenges, Rolls-Royce’s leadership remains confident in its ability to deliver on its targets and continue its transformation journey. With a strengthened balance sheet, strong cash flows, and a clear growth strategy, Rolls-Royce is well-positioned to capitalize on the recovery in global air travel and the growing demand for defense solutions. As the company looks ahead, its focus will remain on building long-term resilience and delivering value for its shareholders.