With its strong position in an industry where products can cost millions of pounds, Rolls-Royce (LSE: RR) might seem to have the elements of an attractive income share. Right now though, there is no Rolls-Royce dividend – and the shares trade for pennies.
If I take advantage of the share price at the moment, could I benefit from lucrative dividends in future?
The Rolls-Royce dividend
At the moment, Rolls-Royce is not paying a dividend as it focuses on rebuilding its financial performance after a very challenging few years for the business. Due to restrictions attached to loans the company has taken out, it is not allowed to pay a dividend this year even if its business does well. But the restriction will not apply from next year onwards, depending on how the group does financially. In its final results in February, the company said that “we aim to be able to recommend shareholder payments in the medium term.”
Before the pandemic, the Rolls-Royce annual dividend stood at 11.7p per share. If it was reinstated at that level, the prospective yield at the current Rolls-Royce share price would be a whopping 14.5%. However, I do not expect the dividend to be restored at its previous level if it does make a comeback. In 2020, the company issued new shares to help raise funds. It ended the year with more than quadruple the amount of ordinary shares in circulation compared to the start of 2020.
That matters for dividends, because it means that the pool of profits to be distributed between shareholders needs to be divided among far more shares than before. Therefore, even if profits were the same as in 2019, the dividend per share would now be far lower than it was back then.
Future income shares to buy now?
So, not only is the Rolls-Royce dividend still suspended for this year at least, if it does make a comeback in future it will be more modest than before. The share dilution means the prospective yield would be 3.5% if the company paid out as much in dividends as it did before the pandemic.
That yield is lower than I can get from many FTSE 100 companies right now. It also depends on the company continuing to improve its financial strength and restoring the dividend. Neither is definitely going to happen. From a risk to reward perspective, I would not buy Rolls-Royce shares for my portfolio purely for their income potential.
My next move on the Rolls-Royce share price
However, I would still consider buying more for another reason. Although the income prospects do not seem particularly attractive to me right now, I think the penny share status of the company means it offers me good value right now. Its strong brand, respected reputation, engineering expertise and large installed base could all help to improve profits in coming years.
As the ongoing lack of a Rolls-Royce dividend suggests, the company is not out of the woods yet. Unexpected shocks to aviation demand continue to pose a risk to both revenues and profits. But while I would not buy the stock at the moment purely for future Rolls-Royce dividend prospects, I would consider buying it for my portfolio with the hope of share price growth.
