Rolls-Royce plans record buyback as turbine demand soars

Rolls-Royce Holdings PLC announced a record buyback and dramatically raised its midyear earnings target as the U.K.’s largest manufacturer rides a wave of orders for aircraft engines and the power systems that drive data centers.

The engine maker will buy back as much as $12 billion in stock through 2028, exceeding estimates and making it one of the biggest such programs in U.K. corporate history. Shares subsequently soared to a record high in London trading.

Rolls-Royce is in the midst of a three-year transformation under Chief Executive Officer Tufan Erginbilgic, who is cutting costs and revitalizing once-stalled projects. The company is in a sweet spot because of rising demand for widebody airplanes, the clamor for data centers to serve artificial intelligence and the ramp-up in European defense spending.

“Our transformation continues with pace and intensity,” Erginbilgic said in the statement. “We are consistently achieving outcomes that were not possible before our transformation.”

The company now expects underlying operating profit by 2028 to reach $6.6 billion to $9.44 billion, with an operating margin of as much as 20%.

Rolls-Royce is using its extra cash to reward shareholders for the second straight year. It expects $3.47 billion of the buyback to be completed this year.

Shares rose as much as 8.4% in early London trading to an all-time high of 1,420 pence, propelling Rolls-Royce’s market value to about $157 billion.

The company views smaller engines for narrowbody aircraft as the next big opportunity for the U.K. with a $2.16 trillion market, Erginbilgic told reporters after the earnings release. Rolls-Royce would prefer to work with partners to build the turbines and currently is in talks with several companies, he said.

Thursday’s announcement came after the company reported adjusted revenue for last year that beat analyst estimates.

Rolls-Royce previously predicted operating profit of as much as $5.26 billion, free cash flow of as much as $6.07 billion, and an operating margin of 15% to 17%. For this year, the manufacturer said it expects to deliver underlying operating profit “within the prior midterm guidance range two years earlier than planned.”

The operating margin at the defense and power-supply divisions advanced by more than 14% and is set to continue on that trajectory due to spending on weapons and data centers.

The dividend, its second since before the start of the pandemic, was set at 7 cents per share.