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The Rolls-Royce Holdings (LSE: RR.) share price has skyrocketed even higher in 2024, up nearly 85% year-to-date.
We’re looking at a huge 940% rise since 2020’s low. From a company we feared could go bust, we’re now seeing a 10-bagger for those who got in at the right time.
But does it come as a surprise that Rolls-Royce could post the biggest dividend rise in the whole FTSE 100 this year in cash terms?
Dividend stars
That’s what AJ Bell‘s latest Dividend Dashboard, a regular look at the FTSE 100’s dividend stars, suggests.
It found an analyst consensus for a £452m hike in ordinary dividend payments this year.
Admittedly, that’s coming off a very low base last year. Well, a base of zero to be precise, with no payout at all. And on the current share price, it would mean a dividend yield of only 1%.
But I still see it as a stunning turnaround. And if forecasts are to be believed, the yield could be up to 1.5% by 2026. With cover by earnings put at 2.8 times by then, there could still be a lot more to come.
I’d thought Rolls could take a good few years to get its debt back to a comfortable level. And a fair bit longer before we could even start to think about dividends.
Debt challenge
Under new boss Tufan Erginbilgiç, Rolls has tackled the debt challenge head on, and looks to be winning.
At H1 time, net debt was down as low as £0.8bn, as the firm posted operating cash flow of £1.7bn.
At the end of 2021, that debt figure had stood at £5.2bn, including leases. Even excluding leases, it was as high as £3.4bn.
Getting it down so far, so fast, is one of the most impressive FTSE 100 management achievements I think I’ve seen in a very long time.
So, my fears about Rolls-Royce’s possible demise have evaporated. The company’s performance, and the share price rise, have blown my socks off.
A dividend buy?
But I won’t be buying.
It’s not that I think Rolls-Royce is necessarily overvalued. The forward price-to-earnings (P/E) ratio is up above 30. But it could drop to 23 based on 2026 forecasts.
And if the growth outlook remains strong, that could still be fair value. I do, however, see more risk in a valuation like that than I need to take right now.
Even if we’re in for a run of dividend rises, they can never be guaranteed. That applies to well-established dividends, never mind ones that are still only in the minds of forecasters.
I do invest for dividends, but there’s almost an embarrassment of high yields out there. I’d rather put more cash into the 7.1% forecast from Aviva, or even go for the 9.8% at M&G.
A word from the wise
Finally, I never forget one of ace investor Warren Buffett’s most famous pieces of wisdom. He said it’s best “to be fearful when others are greedy and to be greedy only when others are fearful“.
I wouldn’t want to be holding if today’s bullish sentiment should change.
