to return 1 billion pounds to investors, shares jump
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[June 19, 2014] By
LONDON (Reuters) -
Rolls-Royce shares jumped 7 percent on Thursday after
the British aero-engine maker decided to buy back shares
worth 1 billion pounds ($1.69 billion) instead of making
any major acquisitions.
The company said it was on track to return to earnings growth next
year, reassuring investors whose confidence was shaken by a cut in
profit guidance in February and an engine order cancellation this
Rolls-Royce shares climbed to 1,076 pence, their highest in over two
months, leading Britain's benchmark FTSE 100 index. The stock had
lost 17 percent of its value over the past six months.
The buyback, equivalent to about 5 percent of the Rolls-Royce's
19-billion-pound market capitalization, will be funded partly by
proceeds from the 785-million-pound disposal of its gas turbine unit
to German conglomerate Siemens AG, agreed in May.
"As no material acquisitions are planned, and reflecting the
strength of our balance sheet, we will return the proceeds of the
energy sale to our shareholders," Chief Executive John Rishton said
ahead of an investor day event on Thursday.
Rolls-Royce had last year considered a bid for Finnish ship and
power plant engine maker Wartsila and analysts had said such a deal
could re-emerge. Shares in that company, currently worth about 8
billion euros, traded down 3 percent.
Rolls-Royce had looked at buying Wartsila as a way to strengthen its
Marine engine business, but the idea left some investors wondering
whether the company was spending indiscriminately in the pursuit of
The share buyback "shows they 'get' how much the Wartsila story
frightened investors", said Edison analyst Sash Tusa.
In further evidence of a more rigorous approach to spending,
Rolls-Royce said it would reduce group capital expenditure to 4
percent of underlying revenue over the next three to five years from
4.9 percent at the end of 2013.
"The buyback is good news because it shows the company is committing
itself to very tight capital discipline, prioritizing rewarding
shareholders ahead of expanding the footprint. This is exactly the
message we were looking for after a challenging six months," said
Espirito Santo analyst Edward Stacey.
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Rolls-Royce joins a number of British blue-chip companies signalling
a focus on returning cash to shareholders.
Oil companies BP and Shell have this year said they will rein in
spending and return spare cash. Vodafone in February directed the
$24 billion made on the sale of its stake in U.S. operator Verizon
Wireless back to investors.
Analysts expect Rolls-Royce to post flat pretax profit of 1.7
billion pounds for 2014. Before February's warning, they had
expected pretax profit growth of 8 percent this year.
The company reiterated earlier guidance that it was on track to
return to growth in 2015, when it is due to ramp up production of
The company has enjoyed strong profits and revenue growth for 11
years as soaring demand for more fuel-efficient engines for
passenger planes made by Airbus and Boeing boosted its civil
aerospace unit, which generates about half of its sales.
(Reporting by Sarah Young; editing by James Davey and Tom Pfeiffer)
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