Dividend Decision at Rolls-Royce (Part A)

On November 12, 2015, Rolls-Royce Holdings PLC (Rolls-Royce), one of the largest aircraft engine manufacturers in the world, issued its fifth profit warning within twenty months . In an update on the operational review, Warren East (East), CEO of Rolls-Royce, said the earnings were expected to be lower by £650 million in 2016 and the company was contemplating a dividend cut in the near future.

The announcement saw shares of Rolls-Royce plunging by 20% to £536.5 the same day, the biggest share price drop for the company in 15 years. According to analysts, a series of profit warnings since 2014 and the sudden change in dividend policy were not received well by markets since the company had no record of dividend cuts in the preceding 24 years despite several instances of underperformance. ..