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Should I buy Rolls-Royce shares for 2023 dividend potential?

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Since the pandemic hit in 2020, Rolls-Royce (LSE:RR) shares have been on a downward trend. Over the past year, this fall has moderated somewhat, down only 14%.

However, most investors have been focused on the potential movement in Rolls-Royce shares, not the dividend potential. Even though the business doesn’t currently pay out any income, is this a new angle I should be looking at?

Historical dividend payments

It’s true that since 2020, the business has cut the dividend to zero. Yet before that, it had a long history of paying out regular dividends. In fact, Rolls-Royce paid them continually for the past two decades. Therefore, my consideration of future income potential isn’t crazy at all.

In fact, in the final two full years of dividends being paid, it added up to an annual average of 11.70p per share. Given the current share price of 106p, this would give a current dividend yield of 11.03%. If reinstated at this same level, it would be one of the highest yielding stocks in the entire FTSE 100. Ok, now everyone is paying attention!

Restrictions in place

One reason why I hadn’t spent much time on dividend analysis for the business last year was due to the restrictions in place. In a report, it stated that “some of our loan facilities place restrictions and conditions on payments to shareholders”.

Given the size of the debt pile the business took on during 2020 and 2021, the creditors logically made clauses to prevent dividend payments. After all, they want their loans repaid first, before any money is paid out to shareholders.

This makes sense, but 2023 could be different. On the website, the business comments that “the Board may recommend shareholder payments from 2023, subject to satisfaction of the conditions and our consideration of progress made to strengthen the balance sheet”.

The balance sheet has been strengthened significantly. A November trading update confirmed that the £2bn proceeds from an asset sale have been used to pay back a loan. It also has an additional £2bn in cash and £5.5bn worth of undrawn credit facilities. On the basis of those figures, the case for paying a dividend is more compelling.

Buying the shares for income

Even with the company’s finances improving quickly, I think a dividend this year is unlikely. I believe the debt will need to be reduced further, as well as the company generating a larger profit.

I don’t rule it out completely. But I’m not going to buy now as I feel there are much better dividend stocks currently paying out income.

However, I’m definitely going to keep a close eye on future trading updates from Rolls-Royce, with a focus on dividend comments. Historically, the business had a proud record of income payments. It knows this will also help to attract buyers, further stoking the recent rally.

The post Should I buy Rolls-Royce shares for 2023 dividend potential? appeared first on The Motley Fool UK.

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Jon Smith 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.