The Rolls-Royce (LSE:RR) share price was hammered on Thursday as it fell over 18% on the news of CEO Warren East stepping down after nearly seven years at the helm, and showed only a small rebound on Friday morning. The FTSE 100 engine manufacturer has not only had a bad week but a bad three years, with the share price down 68% from February 2019.
Is the share price overreacting?
Some positives can be taken from the recent earnings report that show some hope for the Rolls-Royce share price. A major restructuring programme, undertaken by the departing CEO, saw a streamlining of operations with 9,000 jobs cut and unnecessary costs eliminated. This restructuring has helped Rolls-Royce turn a £4bn loss in 2020 to a small but important £124m profit in 2021.
The company has cut down on its cash-intensive operations and costs and saw only £1.5bn in cash leave the company in 2021 compared to a massive £4bn the year before. This strengthening of cash flow makes the company less reliant on taking on further debt to finance current operations and will boost future financial health.
Rolls-Royce’s power-by-the-hour business model, where airlines pay a flat rate per hour flown with Rolls-Royce engines, has harmed the company during the pandemic, with large fleets of grounded jets. However, as the travel industry prepares for a summer with loose travel restrictions, the skies will be filled once again and Rolls-Royce will be the recipient of a steady stream of income.
Further turbulence ahead for Rolls-Royce?
Rolls-Royce was forced to take on over £7bn in debt over the pandemic and sees current debt at £5.2bn, which is no small sum. As a term of some of the loans taken, Rolls-Royce is not allowed to pay a dividend until at least 2023 and I wouldn’t be expecting one until at least 2025 considering current financial instability. As a result, there are other FTSE 100 shares I’m turning to when I’m looking to boost my dividend income stream. Â
The news of CEO Warren East stepping down at the end of the year understandably harmed the Rolls-Royce share price, and it could suggest some deeper concerns for the FTSE 100 giant. East trimmed down costs and made the company profitable but is now jumping ship — this could indicate a lack of direction in the senior management team.
Am I investing today?
I believe that the drop in the Rolls-Royce share price has been a slight overreaction but there are still legitimate concerns about the health of the company. The restructuring efforts, positive earnings report and a good summer for air miles all indicate brighter skies ahead.
Despite all this, I am only adding Rolls-Royce to my watch list considering the shifts in leadership, high debt, and absence of a dividend. I believe the risks outweigh potential opportunities at this moment in time.