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Rolls-Royce may cut its dividend - analysts

Jet engine maker is expected to update on cost-cutting and its order book
Rolls-Royce may cut its dividend - analysts
Rolls-Royce has faced turbulence in aerospace markets

Investors will be hoping for an uplift in the fortunes of Rolls-Royce (LON:RR.) when the jet engine maker reports annual results on Friday, although analysts say it may cut its dividend.

Rolls has flown into turbulence in the last year or so as lucrative aerospace after-sales repair and maintenance business has dropped off and marine power markets have declined.

The problems sparked several profit warnings and the departure of John Rishton as chief executive in April last year.

New chief executive Warren East has since launched a restructuring drive involving cutting thousands of jobs and removing layers of senior management.

Shares in the company, which has sites around the world including Derby and Bristol in the UK, have more than halved from 1240p in January 2014 to about 531p in afternoon trading on Thursday.

Rolls has continued to increase its total order book, which stood at £76.5bn at the end of July last year, as airlines continued to buy new-generation jets from Airbus (EPA:AIR) and Boeing (NYSE:BA).

But its aerospace business has faced headwinds  including sharply lower volumes of corporate jets powered by its engines and further weakness in demand for after-sales services.

Demand for repair and maintenance services on engines for older wide-bodied jets has also declined as airlines start to fly new fuel-efficient aircraft.

And in its marine business, the company has faced reduced demand as lower crude prices have forced oil companies to cut investment in new offshore drilling projects.

In November, Rolls said its 2015 guidance was unchanged but it expected profit to be at the lower end. It also predicted sharply weaker demand in 2016.

Analysts said markets already appeared to be pricing in the prospect of another profit warning as well as a possible dividend cut.

They have also speculated that the company may raise extra capital to strengthen its balance sheet and speed up its restructuring and modernisation.

Mike van Dulken at Accendo Markets said the company could announce its first dividend cut in more than 20 years, although he said there has been talk of it avoiding another profit warning.

Analysts at The Share Centre noted recent deals including a US$2.7bn order from Nordic carrier Norwegian for Trent 1000 engines for 19 Boeing 787 Dreamliners.

The Share Centre’s Graham Spooner said: “Investors will look to see what other changes are likely to come along and how its high fixed costs can be cut.

"They will also be taking note of the size of the order book, which should have risen courtesy of a new large contract it has won with Norwegian Air.

“Investors should also be aware that there is the possibility of a dividend cut in difficult times.”

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December 16 2015

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