Rolls-Royce Says Sorry With $1.7 Billion Buyback

Rolls-Royce’s boss John Rishton had a clear message for investors Thursday: Sorry.

For years, the aero-engine maker was a stock-market darling. Rolls-Royce’s yearly sales and earnings growth was reliable to the point of being dull.

Of late, Rolls-Royce has been anything but boring. Just not for the reasons investors like.

The U.K. Serious Fraud Office and U.S. regulators have been looking into alleged illegal business dealings Rolls-Royce conducted in Asia. The probe remains open.

The British company tried to strengthen its maritime engine business through a $10 billion takeover of Finland's Wärtsilä Oyj (WRT1V.HE) which rebuffed Rolls-Royce’s preliminary approach. The attempted acquisition of a company of that size surprised investors who hadn't realized expansion was on management's agenda so soon after its full takeover of Tognum, a German engineering company originally acquired in partnership with Daimler.

Mr. Rishton caught investors off-guard again in February when he said there would be no growth in profit and sales this year.

Investors voted with their feet. The stock slumped more than 19% this year.

True, Mr. Rishton hasn’t been twiddling his thumbs. Now three years in the job, he is cleaning house, sweeping out inefficiencies that had crept in during a decade of expansion in which Rolls-Royce grew its equipment-services business rapidly amid a boom in demand for passenger aircraft. Selling the company’s subscale industrial gas turbine business to Siemens (SIE.XE) showed how Mr. Rishton wants to focus Rolls-Royce on areas with the best growth potential.

The goal: to bring profitability on a par with rivals such as General Electric Co.(GE)

At Thursday’s presentation to analysts, Mr. Rishton was keen to calm investor nerves and show he is serious about that task.

The £1 billion share repurchase, a first for the company, rewards shareholders for their loyalty. Mr. Rishton ruled out fancy deal-making, reassuring investors that Rolls-Royce won’t squander money on empire building. The proceeds from the Siemens transaction, due to close by year end, will finance the share repurchase.

Rolls-Royce will also curtail capital expenditure, without crimping too much on R&D, as these costs should fall to around 4% of underlying sales before the end of the decade from 4.9% last year.

Mr. Rishton had one more message for shareholders long used to Rolls-Royce’s minimalist approach to investor relations. Greater transparency is in the offing. Thursday’s investor day would be followed by more, Mr. Rishton promised.

Investors liked what they heard. Rolls-Royce shares jumped 6%.