FTSE 100 aerospace company Rolls-Royce Holdings (LSE:RR) experienced a £4bn loss in 2020. But reassuringly it has told the BBC “the worst is behind us“. So, does that mean it’s onwards and upwards for the Rolls-Royce share price?
The £4bn loss is a particularly hefty kick in the teeth after posting a £583m profit the year before. But considering the impact of the Covid crisis on the business, I’m surprised the Rolls-Royce share price hasn’t suffered more. It’s down 38% in a year, but up 25% in a month. Loyal shareholders seem to keep the long term in mind, although the price is subject to considerable volatility.
Rolls-Royce revenue risks
Unfortunately, Rolls-Royce has never faced such revenue risks as the pandemic has brought to its door. It’s already laid off 7,000 employees and could cut another 2,000 in the coming months. Plus it expects a further £2bn cash burn in restructuring costs.
The main risk to its income is air travel. It profits from servicing aircraft engines, unfortunately the pandemic stopped flying activity and slashed revenues.
Rolls-Royce has already issued shares to raise additional cash and plans to dispose of assets too. However, Norway recently postponed the €150m sale of its Norwegian division on security grounds.
Its defence operations enjoyed an 8% rise in 2020 profits, but sadly accounted for under 30% of the group’s total revenue. So that gain didn’t do much to make up for the extensive losses in its civil aerospace arm.
But with vaccine uptake throughout the world, the signs of air travel recovery are getting stronger. Yet that’s still dependent on international agreements, passenger testing, and vaccine success. There’s also the worry that new virus variants could upend the vaccine success story.
Long-term outlook
The UK economy shrank less than expected in January, which is a reassuring sign. And PwC says 2021 will be a year of business reinvention. That’s something Rolls-Royce must do if it’s to have a long-term chance of survival. It’s certainly a focus for the group and it recently signed a deal with Scandinavian airline Wideroe, for a new electric aircraft to fly regional routes.
As well as maintaining its existing customer base, it needs to spend on greener forms of propulsion, including batteries and hydrogen. That won’t come cheap.
Rolls-Royce is a prestigious company with an impressive legacy and a lot to like. I’ll be surprised if it goes out of business, but I think the next few years will be tough.
Is Rolls-Royce paying a dividend?
Rolls-Royce isn’t paying a dividend and given the circumstances it finds itself in, I think that’s wise. The company used to pay a dividend, and I’m sure that will resume once it’s back in a position of strength. But that could be several years from now.
It has £9bn of liquidity at its disposal, which should last two years. If it can weather the storm, it should emerge a much stronger, streamlined company, with a higher share price. But I think it will take years to achieve and it’s certainly a risky investment today.
The company only makes significant income if planes are flying. This is expected to increase this year, but if it makes half what it did pre-pandemic, that will be impressive.
Personally though, I won’t be adding Rolls-Royce shares to my Stocks and Shares ISA today.