The world’s second largest maker of aero engines has reduced the dividend paid to shareholders by 50% to 7.1p a share, the first such cut since 1992. And yet not only did RR’s own share price rise by 13% on the news, it led a recovery across the market this morning – the FTSE 100 was up 55 points to over 5,592.
What’s going on? It’s more proof that bad news is the new good news – or to be more precise, not-quite-as-bad-as-expected bad news is the new good news. RR’s chief exec, the organ-playing ex-boss of Cambridge chip superstar ARM, Warren East, had already braced investors for a raid on the divi way back in Nov, so they knew it was coming.
The much greater fear in the market was that RR would announce yet another profit warning (it would have been its sixth is less than two years). By avoiding this doomsday scenario, East has stemmed the relentless tide of bad news emanating from RR recently and been rewarded with a ‘Phew what a relief’ bounce in the share price. Assisted by markets which after a bruising week are looking hard for something, anything, to feel good about. He has also apparently scotched rumours that a rights issue might have been under consideration. Not a bad morning’s work.
But there is more to this latest set of results than the divi drop. Underlying pre-tax profits are off 12% at £1.4bn while revenues are a shade below expectations at £13.4bn. Profit at the troubled marine business, hit hard by strategic mis-steps and the oil-industry spending freeze, more or less vanished, down 94% to just £15m.
On the bright side Rolls order book – an asset which many of the friction free digital disruptors we hear so much about would love to have – was up £2.7bn to a whopping £76.4bn.
The root and branch restructuring begun last year continues apace too, with more job losses still to come on top of the 3,600 already confirmed (which will include 50 out of the 200 most senior managers at the firm). Cost savings of £145m are on target for the year although talk of a potential sell off of underperforming businesses was played down. East is also known to be keen on speeding up a digital shopfloor revolution to boost manufacturing efficiency.
Fixing Roll’s underlying issues of inept strategy, lack of agility and poor decision making is going to require more than a bit of –admittedly deft – shareholder expectation management.
But unlike his predecessor, East has a grand plan to do just that, and the signs are that it's working so far. If it does come off then this morning’s news could come to be seen as a turning point in the firm’s fortunes. Neither the end, nor even the beginning of the end. But perhaps the end of the beginning?