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Rolls-Royce: A FTSE 100 Dividend-Raising Star

http://www.fool.com/investing/international/2012/10/25/rolls-royce-a-ftse-100-dividend-raising-star.aspx

Kevin Godbold
October 25, 2012

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 fl