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Rolls-Royce Plans Not To Miss Targets This Time

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What's going on?

Rolls-Royce, one of the few British industrial giants remaining, saw its stock rise 14% on Friday – mainly because it did not issue another profit warning! (that means it reiterated rather than cut its expectations for its future profit).

What does this mean?

Rolls-Royce warned investors back in November, for a fifth time in recent years, that profits would be lower than forecast going forward. And the company still faces significant struggles: its business of selling and servicing airplane engines has slowed and its costs are simply too high. Declining aircraft orders from the likes of Airbus and Boeing don’t bode well for the future (Rolls-Royce makes engines for both companies).

Why should I care?

The bigger picture: Rolls-Royce is not about fancy cars. In fact, this Rolls-Royce no longer has anything to do with the eponymous car brand (the car is actually made by BMW). Think of Rolls-Royce like Britain’s answer to America’s General Electric: both make big engines for commercial planes and military aircraft (amongst other things). And so, the decline in things like military spending and private jets in the past decade has hurt profits.

For the stock: Investors are expressing confidence in the current CEO and his team. The company realizes it needs to cut a lot of its costs – it basically got too fat while the good times were rolling. Part of this involves cutting its cash payout to its shareholders (a.k.a. its dividend) for the first time in almost 25 years. Often a dividend cut is derided by investors, but this time it seems that investors think it’s necessary in order to turn the company around.

Originally posted as part of the Finimize daily email.

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