As Rolls-Royce's share price rises, are we looking at a future dividend star?

I Company Rolls-Royce Holdings (LSE: RR.) share price has risen sharply in 2024, up almost 85% year to date.

We are looking at a whopping 940% increase from the 2020 low. For a company that was feared to be disrupted, we are now seeing a 10-pack of timely entrants.

But it's surprising that Rolls-Royce can post such a big increase in budgets across the board FTSE 100 this year with money?

Separating stars

That's it AJ BellThe latest Dividend Dashboarda regular look at the FTSE 100 breakout stars, suggests.

It received analyst consensus for a £452m rise in ordinary dividend payments this year.

Granted, that's off a much lower base than last year. However, the base is zero accuracy, with no payment at all. And at the current share price, it would mean a dividend yield of only 1%.

But I still see it as an amazing change. And if forecasts are to be believed, the yield could reach 1.5% in 2026. With cover by earnings set at 2.8 times during that period, there could be more to come.

I thought Rolls would take a few years to get its credit back to a comfortable level. And it's a long time before we start thinking about the benefits.

Debt challenge

Under new manager Tufan Erginbilgiç, Rolls has tackled the debt challenge head-on, and looks to be winning.

During H1, net debt fell to £0.8bn, as the company posted an operating income of £1.7bn.

At the end of 2021, that figure stood at £5.2bn, including leases. Even excluding leases, it was as high as £3.4bn.

To bring it down so far, so quickly, is one of the most impressive FTSE 100 management achievements I think I've seen in a very long time.

So, my fears about the possible demise of Rolls-Royce have evaporated. The company's performance, and the rising share price, knocked my socks off.

Buying shares?

But I won't buy.

It's not that I think Rolls-Royce is very important. The forward price-to-earnings (P/E) ratio is high above 30. But we could go down to 23 based on 2026 predictions.

And if the growth outlook remains strong, that could still be a fair price. I see, however, more risk in an estimate like this than I need to take right now.

Even if we expect dividends to rise, they will never be guaranteed. That applies to well-founded dividends, never mind those that are only in the minds of forecasters.

I plant for dividends, but there is almost an embarrassment of great harvests out there. I would like to add more money to the 7.1% forecast. Avivaor even getting 9.8% on IM&G.

A word from the wise

Finally, I'm not forgetting one of Warren Buffett's most famous pieces of wisdom. He said it's better “fearing when others are greedy and being greedy only when others are afraid“.

I wouldn't want to hold back if today's sentiment changes.