Rolls-Royce surges after share buy-back announcement

News that Rolls-Royce is to turn £1 billion to investors through a share buy-back scheme has pushed the shares 7.1% higher on Thursday.

The buy-back will begin when the sale of Rolls Royce's energy gas turbine and compression business to Siemens is completed at the end of the year.

John Rishton, chief executive of Rolls-Royce, said: "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."

Analysts were equally pleased about the confirmation that there would be no further acquisition as they were about the prospect of money being returned to shareholders.

"The £1 billion share buy-back, that no large merger and acquisition is in the pipeline and confirmation of guidance for full year 2014 (flat revenue and profits) and full year 2015 (growth in revenues and profits) show that management have taken on board concerns raised by investors in recent months and suggest Rolls will pursue its strategy to become a diversified industrial more organically and less via merger and acquisition," said Investec analyst Rami Myerson.

Myerson retained his 'buy' rating and place a target price of 1,225p on the shares, which were trading at a peak of 1,091p on Thursday.

Jefferies analyst Ben Bourne, who also placed a target price of 1,225p on the shares, said "many expected worse" from Rolls-Royce guidance and he reiterated Myerson's relief that the company had no plans to target another acquisition.

Bourne noted the failed takeover talks with Finnish marine engineer Wartsila at the beginning of the year.

"No material acquisitions are planned, which is a relief in itself as many investors were still concerned they would make another play for Wartsila post-July requiring more equity," he said.

The upbeat guidance will also put concerns about a hangover from the first-quarter downgrade and order book losses to rest.

"There has been plenty of food for the bears recently - the first quarter downgrade, a heavy second-half free-cash-flow and 3.5% order book reduction due to the Emirate's A350 cancellation," said Bourne. "Today's reiteration of guidance will be well received as the above had led some to believe in another downgrade."

Investor view

Discussions on the Interactive Investor discussion board were not as positive as the analysts about the plans for the share buy-back.

'Pearlsasinger' said: "I strongly dislike share buy-back decisions. It usually indicates an absence of any real imagination or innovation. I am very surprised that Rolls-Royce should engage in this tactic."

While 'casabanker' said they were "happy" with today's share price rise they would have preferred an increased dividend.

"Maybe I would have been happier still with a higher dividend," they said. "According to the [Rolls Royce] CEO, the balance sheet is strong so maybe we will all have our wishes granted."

Shareholder 'gamesinvestor' said they would have preferred the money to be used "to develop the business and get a better return on investment than buy-back shares after a five year hike in its price".

"Management decisions in this area seem illogical and it calls into question the incentive packages these guys have."

'Games investor' went on to add: "I'm more interested in the long-term growth of the business, not a manipulation of the earnings per share figure to suit management incentive packages. Share buy-backs rarely deliver real shareholder value in the long-term and invariably are executed by management at the wrong time."