Stock market

Are Rolls-Royce shares good for passive income?

Image source: Rolls-Royce plc

Go back about 10 years and Rolls Royce (LSE:RR.) was one of the best passive income stocks around. In 2015, shareholders received a dividend of 23.1pa a share – a yield of around 12%.

But the pandemic took its toll on the company. It had to suspend its payments and issue new shares to survive. If proof were needed that profits are never guaranteed, Rolls-Royce provides a good example.

Then and now

At the end of 2023, the engineering company had 8.417 billion shares outstanding, up from 1.838 billion on December 31, 2015.

This now gives the company a problem. To pay a dividend of 23.1p, it would cost £1.94bn – £1.5bn more than in 2015.

And that tells me that if the Rolls-Royce dividend is reinstated, it will be much smaller than it was a decade ago.

Looking to the future.

However, there still appears to be some uncertainty as to whether shareholder payouts will start soon.

The company’s 2023 annual report was vague on the subject, stating: “When the board is confident that balance sheet strength is ensured and we are comfortably within an investment grade profile, we are committed to restoring and increasing shareholder distributions.”

Investment grade profile means a credit rating of at least BBB-. This means less risk of default.

Encouragingly, all three major agencies have assigned this rating to Rolls-Royce. But this is the minimum level set by the company itself. Requirement for resumption of dividend “Relax insideInvestment grade limit.

And to get there, the company needs to be profitable. It should then receive enough cash to help pay off some of its debt and improve its balance sheet.

Analysts’ Opinion

However, the so-called ‘experts’ are expecting profits soon.

Analysts’ consensus forecast is for earnings per share of 2.6pa for the year ending December 31, 2024 (FY24). It is then expected to increase over the next three years — to 4.4p (FY25), 6p (FY26), and 7.7p (FY27).

Based on the current share price of around 430p, a dividend of 7.7p would represent a yield of just 1.8%. It’s well down FTSE 100 3.8 percent on average.

But opinion appears to be divided. Analysts’ biggest disappointment is not expecting profits in FY27. And the most optimistic is forecasting a 15.6pa share, although that would still yield below the Footsie average.

Final thoughts

The recent impressive rise in Rolls-Royce’s share price suggests that many investors have found reasons to buy the stock. It has increased by over 175% since May 2023. This makes it the best performer on the FTSE 100.

Personally, I would have to do more research before jumping to that conclusion.

But I’ve decided that those looking for shares that offer generous levels of passive income should look elsewhere.

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