Another market update, another profit warning. An interim management statement from aircraft engine maker Rolls-Royce (RR.) sees the £9.9 billion cap plunging a bracing 20.5% to 530.25p. Profit is now expected to be at lower end of range of market forecasts.

The aerospace behemoth is blaming lower demand for aircraft engines and overhaul work for the £650 million hit to earnings and a pre-tax profit set to come in at the lower end of a £1.3 billion to £1.47 billion range.

A big question mark hangs over the dividend, as hinted by the company in the announcement. Analysts had been expected in the region of 24.6p per share to be paid in 2016.

Rolls now trades on a prospective 4.6% yield following the latest share price slump. We wouldn't be surprised to see dividend forecasts downgraded, and therefore the yield to fall.

Read the latest issue of Shares to get more information about the health of FTSE 100 dividends as there are some alarming signs which suggest widespread cuts due to free cash flow issues.


Ahead of Rolls-Royce's latest announcement, Investec analyst Rami Myerson certainly called it right on the engines specialist on 5 November when he said consensus expectations for underlying earnings were too optimistic in both the short and long term.

He argued that forecasts didn't reflect the strategic, end market, accounting or operational challenges that Rolls has to address over the coming years.

Shares in Rolls-Royce are down 39% on the year to date and while some market watchers would counsel that embedded value in the engine maker remains compelling, there is a real sense that this company is not yet out of the woods.

Market challenges going forward include potential declines in the useful lives of aircraft combined with improving reliability of Rolls engines. This could reduce the earnings potential of each engine and the whole installed base.

Sentiment is also likely to be highly sensitive around the record backlog for its Trent engine range with investors banking on an attendant upswing in earnings.

As illustrated by the group's half year results to 30 July, the reduction in Trent 700 engine deliveries in 2016 and 2017 is expected to have a marked effect on profit performance as a result of reduced volumes and pricing.

Issue Date: 12 Nov 2015