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Why the Rolls-Royce dividend forecast is a buying signal for me

Jumbo jet preparing to take off on a runway at sunset

Jet engine maker Rolls-Royce Holdings (LSE: RR) has been through a tough time over the last years. But dividend forecasts show that shareholder payouts could be restarted next year.

I reckon it could be time to consider buying Rolls-Royce shares.

Green flag for dividends?

The pandemic shut down the aviation industry and dealt a painful blow to Rolls-Royce. The group had to raise money from shareholders and borrow money to survive.

These loans were a lifeline at the time, but they came with strings attached — including a ban on dividend payments until at least the end of 2022.

Rolls-Royce has now started the process of releasing itself from these restrictions. The group recently received €1.7bn from the sale of its ITP Aero parts business. This cash has been used to help repay a £2bn government-backed loan that was taken out in 2020.

From what I understand, this repayment could help to clear the way for dividend payments to restart in 2023.

Of course, there is another reason why Rolls-Royce hasn’t been paying dividends — it’s been losing money. Will that change in 2023?

Getting back to normal

I recently flew long haul for the first time since before the pandemic. The flight was full, and the airport was just as busy as I remembered.

The trip reinforced my view that air travel is now returning to normal. That should be good news for Roll-Royce, which supplies many of the jet engines used on larger, long-haul aircraft.

Admittedly, the company still faces risks. In the short term, high fuel costs and a widespread economic slowdown could hit demand for flying. Looking further ahead, it’s not yet clear how the aviation industry will cut its carbon emissions. If Rolls doesn’t grab a lead in this sector, it could lose customers.

The future is always uncertain. What I do know is that Rolls-Royce’s half-year results showed a £1bn increase in operating cash flow compared to the first half of 2021. To me, that’s concrete evidence that a recovery is underway.

Indeed, broker forecasts suggest Rolls-Royce will turn cash flow positive this year, generating around £160m of surplus cash. This is expected to pave the way for a much stronger result of £710m in 2023.

Rolls-Royce: latest dividend forecast

Broker forecasts are like weather forecasts. They’re based on good methodology, but they aren’t guaranteed to be correct.

However, the latest dividend forecasts from City analysts seem encouraging to me:

Year Forecast dividend Dividend yield*
2023 0.6p 0.7%
2024 1.2p 1.5%
*Based on a share price of 81p

Rolls-Royce’s forecast dividend yield is still low. But I think this business could enjoy a surprising tailwind under incoming chief executive Tufan Erginbilgic.

The reason for this is that the majority of Rolls-Royce’s profits come from servicing and maintaining jet engines, not from selling them.

Right now, Rolls’ current in-service engine fleet is relatively new and modern. That means that they should still have a long operational lifespan remaining, providing reliable cash flows and profits.

On a three-to-five-year view, I think Rolls-Royce should be a profitable investment that will generate a growing stream of dividends.

Of course, there’s no guarantee of this. But if my portfolio wasn’t already fully invested, I would consider starting to build a position in Rolls-Royce shares.

The post Why the Rolls-Royce dividend forecast is a buying signal for me appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.