Rolls-Royce shares hit record high as profitability accelerates

Rolls-Royce has restarted dividend payments and raised full-year guidance after chief executive ‘Turbo’ Tufan Erginbilgic’s drive for profitability showed progress in the first half.

The FTSE 100 aircraft engine maker posted underlying operating profit of more than £1.1bn for the first six months of the year, up 70.7 per cent from £673m a year earlier.

Erginbilgic has implemented a strict cost-cutting programme (expected to reduce spending by £200m a year by the end of 2025) and has paid down some of Rolls’ significant debt.

Rolls attributed an underlying margin of 14 per cent on revenues of £8.2bn to “the impact of our strategic initiatives, with commercial optimisation and cost efficiency benefits across the group”.

Civil aerospace showed the biggest improvement, with an operating margin of 18 percent, up from 12.4 percent last year, supported by increased flight hours for large engines.

Rolls builds aircraft engines, but makes its money from repairing and maintaining them, so the number of flight hours is crucial to its success.

Defense also posted a solid underlying operating margin of 15.5 percent as geopolitical tensions drive higher spending globally.

Meanwhile, its power systems division benefited from “growing demand for data centers.”

Rolls said it was also able to “mitigate the impact of inflation” across all divisions, thanks to its cost efficiency actions.

Rolls-Royce shares rose 10.1 per cent to a record high of 499 pence by midday. They have risen almost 170 per cent in the past year alone.

Erginbilgic, who described Rolls-Royce as a “platform on fire” when he first joined, said: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient and growing business is progressing with pace and intensity.

‘We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing.’

The group updated its full-year profit expectations to a range of £2.1 billion to £2.3 billion, up from £1.7 billion to £2 billion previously.

It also expects to generate free cash flow of up to £2.2 billion, up from a previous high of £1.9 billion.

On investor payouts, Rolls said: ‘We are restoring shareholder distributions in respect of the full year 2024 results, commencing with a payout rate of 30 per cent of underlying profit after tax to be paid in 2025.

‘We expect regular distributions to shareholders to be based on a payout rate of 30 to 40 percent of underlying profit after tax over the medium term.’

eToro analyst Mark Crouch said: ‘When Tufan Erginbilgic took the wheel in January 2023, the company was reeling, marred by underperformance and struggling to recover from the impact of the pandemic.

‘And yet, in just eighteen months, these results demonstrate that Rolls Royce is back in full swing.’