Rolls-Royce: A FTSE 100 Dividend-Raising Star

In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF  (LSE: ISF.L  ) , for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share

19.1p

20.2p

17.1p

16.2p

18.1p

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Rolls-Royce Holdings  (LSE: RR.L  ) . The big question is can the company's dividend continue to outperform its index. Let's take a closer look.

Rolls-Royce's aero-engines power both military and civil aircraft and the firm is also a supplier of power-generating turbines to the marine and energy markets. Although well known for its prestige motor marque, it sold the car business to Vickers in 1980, but retained the rights to the brand name. With the shares at 854 pence, the market cap is £15,989 million. This table summarizes the firm's recent financial record:

Year

2007

2008

2009

2010

2011

Revenue (£m)

7,435

9,082

10,414

11,085

11,124

Net cash from operations (£m)

705

1015

859

1340

1306

Adjusted earnings per share

34.06p

36.7p

39.67p

38.73p

48.54p

Dividend per share

13p

14.3p

15p

16p

17.5p

So, the dividend has increased by 35% during the last five years -- equivalent to a 7.7% compound annual growth rate.

Providing what the firm describes as integrated power systems and services has been good business in both the initial equipment supply and the servicing after markets of the industries served. In 2011, around 49% of revenues came from civil aerospace, 20% from defense aerospace, 20% from the marine market, and 11% from the energy industry.

The company operates in many countries and analyzes its revenue by region. Last year, North America was the biggest contributor at 35% of the total, followed by Europe at 30%, the Middle East & Asia at 21%, China at 8%, and 6% from the rest of the world. Right now, the order book stands at around £60 billion and, going on past performance, there seems every chance of that potential turnover swelling the cash coffers, which looks promising for the continuation of the progressive dividend policy.

Rolls Royce's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: adjusted earnings covered the recent payout almost three times. (4/5)
  2. Net cash or debt: the company had some net cash at the last count. (5/5)
  3. Cash flow: net cash flow supports operating profits but both have been flat lately. (4/5)
  4. Outlook and recent trading: good recent trading with a cautiously positive outlook. (4/5)

Overall, I score Rolls-Royce 17 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the FTSE 100.

Foolish summary
The company scores highly with all four indicators.

Right now, the forecast full-year dividend is 21.82 pence per share, which supports a possible income of about 2.5%. Although the business seems to be growing, I'd want a little more immediate return than that so the firm can stay on my watch list, for now.

Rolls-Royce Holdings is one of several dividend out-performers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: "8 Income Plays Held by Britain's Super Investor." This free report analyzes the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here now to discover his favorite dividend opportunities with good growth potential.

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Further investment opportunities:

Kevin Godbold does not own any shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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