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INTERVIEW Rolls-Royce increases dividend for first time in four years


LONDON (XFNews) - Rolls-Royce Group PLC today pleased shareholders with its first dividend increase since 2001 and held out the prospect of further rises in the future.

The aero-engines group is raising its interim dividend by 5.0 pct to 3.34 pence a share as underlying pretax profits for the six months to June 2005 jumped by 54 pct to 260 mln stg -- well ahead of analysts' expectations.

Given the group's increasingly strong levels of cash flow and lower average net debt -- down from 626 mln to 377 mln stg at end-June -- group chief executive Sir John Rose hinted that further dividend increases could follow.

"Clearly, the rise in the interim payment is a reflection of our confidence in the business. We'll decide on the final payout once we know the full-year outturn," he told AFX News in a telephone interview this morning.

However, analysts are already pencilling in final dividend of about 5.6 pence which would bring the total for 2005 to around 9.0 pence a share -- a 10 pct increase on last time's 8.18 pence distribution.

In the stock market, the group's shares jumped 16-3/4 pence to 328-3/4 at 9.15 am -- the biggest riser in the FTSE 100 index -- on the prospect of further dividend increases and today's better-than-expected figures.

Analysts were looking for pre-exceptional pretax profits of about 190-230 mln stg. Today's figures were the first to be reported under the new IFRS accountancy guidelines. While this made direct comparisons difficult, Rose said the underlying fundamentals were still pretty clear.

"We're making good progress on all fronts. Our order book is now up to 23 bln stg, cash generation is strong and net debt is falling. Group sales increased to 3.18 bln stg in the half driven by a recovery in the civil aerospace division and a strong aftermarket and the group is poised to deliver strong levels of organic growth," he added.

US brokerage Merrill Lynch this morning raised its full-year forecasts by about 10 pct and now looks for profits -- on an EBITA basis -- of 670 mln stg for 2005 and earnings per share 23.8 pence -- which would more than twice cover a projected 9.0 pence total dividend.

First-half underlying profits from the civil aerospace division -- before financing costs -- jumped from 83 mln to 200 mln stg in the period as the recovery gathered pace. The group delivered 441 engines in the half, compared to 384 last time, and the group expects the number of its civil engines in service to increase by 40 pct to 15,500 over the next five years.

"This is a huge market worth 2 trn usd over a 20-year period," said Rose. "Our aim is to have a three-year average share of at least 30 pct of this market," he continued.

The defence division also did well increasing its profits contribution from 82 mln to 94 mln stg on a 6.0 pct rise in sales, while profits from the marine arm were up from 35 mln to 39 mln stg in the half.

The group's energy division reported a small 3 mln stg loss in the period, but Rose said this reflected higher research and development costs. "This division in still in the development phase and we'll continue to push 5 pct of sales into research and development," he added.

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