Why predictable Rolls-Royce headlines miss the point
"Rolls-Royce cuts the dividend for the first time in 25 years." The headlines are predictable and miss the point.
This was expected to be a lot worse. The City had another profits warning pencilled in, shareholders - which in Rolls-Royce's case are predominantly British - feared they weren't going to get anything at all.
Still reading? Good, because you should be. Rolls-Royce is a company whose fortunes should interest you. Rolls-Royce's engines and technology propels passenger airliners, fighter jets, cruise ships, nuclear power stations and nuclear submarines, more specifically our nuclear submarines.
The company also excels at precisely the sort of highly skilled engineering that the Government wants Britain to sell ruthlessly to the rest of the world. Rolls-Royce is global but two thirds of its annual £1.3 billion research and development budget gets spent in Britain.
The Government considers Rolls-Royce so central to our national security that it holds what's called a "golden share" in the company. This special share does not entitle the Government to a share of the much-reduced dividend (£301 million for 2015, even though you didn't ask) but does confer significant influence.
The Government has the power to veto strategic decisions if it disapproves, one half of the Rolls-Royce board and either the chairman or chief executive must be British and the ability of foreign investors to buy shares in the company is restricted.
Which is interesting because in the last year an investor from the US has built a 10% stake in the company (a pretty aggressive act) and is demanding a seat on the board. On the homepage of its website ValueAct Capital gives prominence to a quote from Warren Buffet: "True independence is a willingness to challenge a forceful CEO when something is wrong or foolish". It's hard not to warm to that kind of swashbuckling spirit but goodness knows what the hedge fund's intentions are for Rolls-Royce.
ValueAct clearly believes Rolls-Royce is "undervalued" and could therefore be better run. Partners have met with the chief executive, Warren East, who has been in post for less than a year and has his own plans to improve Rolls-Royce's performance. The relationship is described as "constructive" which gives nothing away.
The reason this will get interesting is that Rolls-Royce's performance will get worse, over the next 12 months. We know this because Warren East has told us. Profits will halve as the low oil price and slowdown in emerging markets hits sales. The order book is heaving, the future looks brighter but there will be moments of doubt and East will find himself under pressure in the months ahead.
This morning Rolls-Royce's shareprice points to the heavens. Hoovering up shares is 13% more expensive than it was yesterday and ValueAct's ambitions are capped at maximum stake of 15% but there's more change coming. Guaranteed.