Rolls-Royce’s record profits in 2024 and buyback plan: A game-changer for investors

Rolls-Royce Holdings has delivered a robust financial performance for 2024, surpassing expectations with significant gains in revenue, operating profit, and cash flow. The company has announced an ambitious £1 billion share buyback program for 2025, reinforcing its financial strength and long-term growth strategy. This development comes as Rolls-Royce continues its transformation into a more competitive, resilient, and high-performing business, achieving key financial targets two years ahead of schedule.

Record Profits and Cash Flow Drive Renewed Investor Confidence

The company reported an underlying operating profit of £2.5 billion, marking a 57% increase from the previous year. This growth was driven by operational efficiencies, strategic cost reductions, and increased demand across its core divisions. Civil Aerospace, Defence, and Power Systems all recorded double-digit revenue growth, demonstrating the effectiveness of Rolls-Royce’s commercial optimization efforts.

Free cash flow surged to £2.4 billion, reflecting a combination of stronger operating profits and improved long-term service agreements. The company ended the year with a net cash balance of £475 million, a significant turnaround from the previous year’s net debt position of £2.0 billion. Liquidity also improved, reaching £8.1 billion, further solidifying Rolls-Royce’s financial resilience.

Share Buyback and Dividend Reinstatement Signal Financial Strength

Rolls-Royce’s decision to initiate a £1 billion share buyback program underscores the company’s confidence in its financial stability and future earnings potential. This move is expected to enhance shareholder value while reflecting the company’s disciplined capital allocation strategy. In addition to the buyback, Rolls-Royce has reinstated dividends for the first time since 2020, proposing a 6 pence per share payout, representing a 30% payout ratio of underlying profit after tax.

Industry analysts note that these actions demonstrate Rolls-Royce’s commitment to delivering long-term value to investors. The improved balance sheet and strong cash flow provide the company with the flexibility to return capital to shareholders while continuing to invest in strategic growth initiatives.

Civil Aerospace Delivers Strong Growth Amid Rising Demand

Rolls-Royce’s Civil Aerospace division recorded a substantial increase in revenue and profitability, benefiting from the continued recovery in air travel and increased demand for aftermarket services. The division’s operating margin rose to 16.6%, supported by higher large engine flying hours, a growing installed fleet, and improved contract terms.

The company has made progress in extending the time on wing of its modern engines, reducing maintenance costs and improving fleet availability for airline customers. The UltraFan demonstrator, a next-generation engine technology aimed at improving fuel efficiency and performance, continues to position Rolls-Royce for future opportunities in both narrowbody and widebody aircraft markets.

The growth in business aviation also contributed to the strong performance of the Civil Aerospace segment. Higher deliveries of Pearl 700 engines, which power Gulfstream’s latest business jets, further strengthened the company’s market position.

Defence Secures Major Contracts, Expanding Long-Term Growth Potential

The Defence division delivered a solid performance, with operating profit increasing to £644 million and a margin of 14.2%. Strong order intake, including an £9 billion submarines contract with the UK Ministry of Defence, highlighted the company’s unique capabilities in the sector. Rolls-Royce’s selection for key US military programs, such as the Survivable Airborne Operations Center (SAOC) and the TACAMO contract, underscores its growing role in global defence projects.

The company’s expansion in submarines production at its Raynesway facility in Derby is expected to support future growth, particularly as the AUKUS alliance between the UK, US, and Australia advances. Defence services revenue benefited from improved aftermarket performance, reinforcing the company’s strategy of increasing the proportion of recurring revenue streams.

Power Systems Growth Driven by Data Centres and Government Contracts

The Power Systems division also delivered strong results, with an 11% revenue increase to £4.3 billion and a 40% rise in operating profit. The business benefited from increased demand in power generation, particularly in the data centre market, where orders rose by 42%. Rolls-Royce’s restructuring of its power generation business model has led to improved margins and higher profitability in this segment.

Government contracts provided another key growth driver, with increased demand for land defence and naval power systems. Investments in next-generation engine technology, set to enter the market by 2028, are expected to strengthen the company’s competitive edge in fuel efficiency and power density.

Rolls-Royce’s battery energy storage systems (BESS) business also recorded progress, securing a major contract in Latvia for one of the largest BESS installations in the European Union. The company’s focus on lower-carbon solutions aligns with its long-term strategy of supporting energy transition initiatives.

2025 Outlook and Upgraded Mid-Term Targets

Looking ahead, Rolls-Royce has issued an optimistic 2025 outlook, forecasting an underlying operating profit of £2.7 billion to £2.9 billion, with a similar free cash flow range. The company has also upgraded its mid-term targets, aiming for an underlying operating profit of £3.6 billion to £3.9 billion and free cash flow of £4.2 billion to £4.5 billion by 2028.

Aerospace market recovery, strong defence contracts, and growing demand in power systems are expected to drive continued financial improvement. Rolls-Royce’s focus on cost efficiency and commercial optimization will remain central to its strategy as it aims to further enhance profitability and shareholder returns.

Industry analysts suggest that the combination of rising earnings, strong cash flow, and balance sheet resilience positions Rolls-Royce well for sustained growth. The company’s ability to achieve its Capital Markets Day targets two years ahead of schedule highlights the success of its transformation program and strategic execution.

Positioned for Future Growth Beyond 2028

Beyond the mid-term, Rolls-Royce sees additional growth opportunities across its core markets. In Civil Aerospace, the company is expected to maintain a strong presence in both widebody and business aviation segments, supported by advancements in engine technology. Improved LTSA margins and enhanced fleet management solutions will drive further aftermarket growth.

In Defence, Rolls-Royce is positioned to benefit from long-term military programs, including next-generation aircraft and submarines. Increasing demand for energy-efficient power solutions in governmental and industrial markets will also contribute to future expansion.

The company’s strategic investments in Rolls-Royce Small Modular Reactors (SMRs) offer another potential avenue for long-term value creation. Rolls-Royce has been named as a preferred supplier for SMRs in the Czech Republic and Sweden, with ongoing regulatory progress in the UK. The ability to capitalize on these opportunities will be a key factor in the company’s future trajectory.