Rolls-Royce and BP: dividend joy and a strategy reset

Future returns for Rolls-Royce Holdings (LSE:RR.) and BP (LSE:BP.) shareholders will become clearer over the next 48 hours when the engine maker reports results and the oil giant unveils a strategy overhaul.

A much stronger balance sheet and the restoration of its investment-grade credit rating will allow Rolls to declare a dividend payout equivalent to 30% of post-tax underlying profit with Thursday’s annual figures.

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Estimates vary on the size of payout, with Panmure Liberum recently pencilling in a figure of 5.2p a share in relation to 2024 trading. This rises to 6.8p and 8.1p in the two following financial years as Rolls increases the threshold to 40% of profit.

The aerospace, defence and power systems-focused company last paid a dividend in January 2020, when it distributed £92 million via an interim award of 4.6p a share.

Thursday’s landmark disclosure is in sharp contrast to just over four years ago, when existing investors were given the opportunity to buy shares at 32p in a £2 billion rights issue.

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Its shares are now trading at near a record of 618p, with Rolls currently worth £51.5 billion and above Diageo (LSE:DGE) and National Grid (LSE:NG.) as the 11th-largest stock in the FTSE 100.

The advance follows a series of upgrades to profit and cash-flow guidance, boosted by the focus of chief executive Tufan Erginbilgic on commercial optimisation and cost efficiencies.

Engine flying hours have returned above 2019 levels and the recovery has stayed on course despite significant supply chain headwinds across the aerospace industry.

Morgan Stanley forecasts a 14% rise in revenues to £17.6 billion, with a margin of 13.4% driving an underlying operating profit up 48% to £2.4 billion. Civil aerospace revenues are seen 20% higher at £8.9 billion, with an operating profit of £1.4 billion up 70% on a margin of 16.3%.

As the 2024 results are likely to place Rolls more than halfway to 2027 profit and free cash-flow targets, the City will be keen for management to issue updated projections.

BP said it intends to review elements of its financial guidance, including expectations for 2025 share buybacks and capital expenditure, when it holds a capital markets day tomorrow.

Speculation that BP will need to pare back distributions has hung over the stock in the past year.

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The poor run for shares has also followed four quarters in a row of City earnings downgrades, driven by disappointment over unplanned outages, a weaker than expected contribution from trading and the slow ramp-up of new growth engines.

BP chief executive Murray Auchincloss has promised a new direction for the oil giant, having laid the foundations for change during 2024.

At this month’s annual results, he said: “We have been reshaping our portfolio - sanctioning new major projects, and focusing our low-carbon investment - and we have made strong progress in reducing costs.

“Building on the actions taken in the last 12 months, we now plan to fundamentally reset our strategy and drive further improvements in performance, all in service of growing cash flow and returns.”

Amid pressure from activist investor Elliott, speculation has focused on a switch back to extracting value from traditional oil and gas.

Allen Good, Morningstar director of equity research, said today: “We expect some combination of capex reduction - focused on low carbon, divestiture plans, cost-cutting, and reversal of hydrocarbon production declines. 

“However, the degree to which these measures are implemented is what matters. Most would be positive. However, management also signalled a reduction in shareholder returns which would be a negative."