Abstract

In November 2015, Rolls Royce Holdings PLC (Rolls-Royce) issued its 5th profit warning in a span of 20 months. Warren East (East), CEO of Rolls-Royce said earnings were expected to be lower by £650 million in 2016 and the company was contemplating a dividend cut in the near future. The shares of Rolls-Royce plunged 20% to £536.5 on the same day, the biggest share price drop for the company in 15 years. East, appointed CEO of Rolls-Royce in July 2015, had been given a mandate by the management to turn the company around. He had planned to simplify Rolls-Royce’s organizational model, streamline senior management, reduce fixed costs and add greater pace and accountability to decision making. He planned to preserve cash through savings measures in the near future. East was firm about his decision on job cuts however he was skeptical about the dividend decision. East said the final decision regarding dividend cut would be decided by the board of directors before announcing annual reports in February, 2016. The (A) case chronicles the journey of Rolls-Royce since 1906, the events that led to bankruptcy in 1971, temporary nationalization of the company in the 1973, and the growth in revenue since the 1990s. The case details the diversified portfolio of the company, future growth prospects and the sudden fall in profits since 2014. Share price movement with event details has been included. The case ends in November, 2015, when the company was undecided if dividend cut was an appropriate decision in the situation.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand why firms pay dividend
• Learn about factors that firms consider while making dividend policy

Keywords

Rolls Royce, Warren East, Dividend Decision, Aircraft Engine Manufacturing, Aerospace, Defence Budget Cuts, Falling Oil Prices, Profit Warning, Dividend Policy, Job Cuts, Financial Strategy