News Column

Rolls-Royce roars ahead on £1bn buyback while Federal Reserve lifts FTSE

June 19, 2014

Nick Fletcher,

In a market receiving a Federal Reserve-inspired boost, Rolls-Royce has roared to the top of the leaderboard.

The aero-engine maker unveiled a 1bn share buyback using the proceeds of recent disposals, since it had no acquisitions on the horizons. It had been linked with a bid for Finnish rival Wartsila last year, and there had been suggestions it might rekindle the deal. But chief executive John Rishton 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.

The company has agreed to sell its gas turbine business to Germany'sSiemens for 785m and the deal is expected to be sealed by the end of the year.

Rolls has been under pressure recently after a surprise profit warning in February due to European and US spending cuts, followed by news that Emirates had cancelled a major Airbus order which would knock 2.6bn from its order book.

But along with the share buyback, the company said it was on track to meet guidance for the year and would cut capital expenditure over the next few years.

The news has sent its shares 63p or more than 6% higher to 10.73. Analyst Rami Myerson at Investec said:

The 1bn share buyback, that no large M&A is in the pipeline and confirmation of guidance for 2014 (flat revenues and profits) and 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 M&A. We believe today's [announcement] and the Capital Markets Day are likely to boost confidence in management and drive the share price. Buy.

Overall the FTSE 100 has jumped 50.73 points to 6829.29 after the US central bank's dovish comments overnight on possible interest rate rises and positive noises about the US economy. ETX Capital said:

The Federal Reserve's monetary policy statement pleased both equity and bondholders in the US, with Fed Chair Janet Yellen saying that accommodative monetary policy, rising home and equity prices and an improving global economy should boost US economic growth. As expected, the Fed cut its bond buying programme by a further $10bn to $35bn but the surprise was the upbeat statement on the US economy, with the central bank seemingly shrugging off recent data showing an uptick in inflation. Ahead of the Fed meeting, traders were worried that rising prices and oil price-spikes would bump up inflation, forcing the Fed to take a more hawkish stance. This proved not to be the case, with the Fed staying positive on the economic outlook while pledging to keep interest rates at ultra-low records.

Still, there is some nervousness among investors given the increasingly troubling violence in Iraq, with some major oil companies reportedly withdrawing staff from the country.

Only four shares in the FTSE 100 have slipped back, among them Shire. The pharmaceuticals group has climbed sharply in recent days on talk it could be a takeover target, but it has edged back 16p to 37.69.

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Source: Guardian Web

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