Should I buy cheap Rolls-Royce shares for dividend growth?

At Rolls-Royce (LSE:RR) share price has rocketed in 2023. Even more broadly FTSE 100 experiencing turmoil in March, the price of Edo engine remains strong.

Since January 1 Shares of Rolls-Royce have risen an impressive 61% in value. However, at least at first glance, the company is still seen as one of the UK’s best blue chip value stocks.

City analysts expect annual earnings to soar 156% in 2023. This leaves the business trading at a forward price-to-earnings growth ratio (PEG) of just 0.2.

Any reading below 1 indicates that the stock is undervalued.

Growth, value, and earnings

Shares of Rolls-Royce clearly give growth and value investors something to get excited about. But brokers also suggest that engineers could also be a good dividend stock to buy now.

This is because the business – which has not paid dividends since 2019 – will restart its payment policy from this year.

Okay, the dividend payout of 1.63p per share for 2023 isn’t the greatest. In fact it sits at a 1.1% dividend yield, well below 3.6% FTSE 100 average.

But strong dividend growth predictions still make Rolls-Royce shares worth considering for passive income. By 2024, total payments are predicted to rise by 81% annually to 2.95p.

Bright vision

City experts predict that revenues will grow significantly over the next few years. This is mainly due to the resurgence of civil aerospace activities, that is, the demand for supercharging for engineer aftermarket services.

The International Civil Aviation Organization (ICAO) has predicted that passenger demand “will recover rapidly to pre-pandemic levels on most routes in the first quarter“, represents a bright outlook for aviation companies and aerospace businesses.

In addition, total passenger demand will increase by 3% annually by 2023.

A healthy civil aviation market is critical for Rolls. It generates about 45% of its revenue from building and servicing aircraft engines.

Things are looking healthy elsewhere, too. New contracts continue to come in at Rolls’ Defense division. And the order book in the Power System unit is located at the top.

Debt problem

Having said all this, I am not prepared to buy Rolls-Royce shares today. My main concern is the size of the company’s debt pile.

Net debt is at £3.3bn at the end of 2022. And businesses could struggle to pay this down if market conditions suddenly worsen again.

Airline ticket sales could fall again if inflation is higher than normal and economic conditions remain difficult. On top of this, profits at Rolls could suffer if supply chain problems and high cost inflation continue.

Here’s what I’m doing right now

Such high debt casts doubt on how Rolls-Royce will finance its cash-intensive development programme.

Designing and building aircraft engines, nuclear reactors and other complex hardware is not cheap. And having a lower budget to operate compared to competing companies can compromise profit growth.

Future dividends may also be compromised by the combination of high bills and large debt. So I would definitely not buy Rolls shares for passive income.

The company’s recovery could continue until 2023. But on balance, I’d rather buy low-dividend-paying stocks now.