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Rolls-Royce halves dividend but shares rally on turnaround hopes

* Final dividend 7.1 pence a share, first cut since 1992

* Company sticks to forecast for 2016 after 5 profit warnings

* Shares (Berlin: DI6.BE - news) jump 16 pct after recent heavy losses (Adds comments by CFO, analyst; updates share price reaction)

By Sarah Young

LONDON, Feb 12 (Reuters) - Britain's Rolls-Royce halved its final dividend to shore up its finances on Friday, the first cut for 24 years, but after three profit warnings last year a more confident tone boosted its shares.

Tough trading in its civil aerospace and marine engine businesses pushed profit at the world's second-largest maker of aircraft engines down 16 percent in 2015 and continuing tough conditions are expected to halve profits in 2016.

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Chief Executive Warren East had said in November that further profit warnings could not be ruled out but he stuck to previous 2016 guidance on Friday despite the bigger-than-expected dividend cut. The shares bounced 16 percent.

East, who became CEO last year, is trying to convince investors that his plan to cut costs and simplify Rolls-Royce will return the company to growth after two years of decline.

The company has yet to say, however, when it will start growing again, although CFO David Smith hinted that the turnaround was underway.

"In my view, 2016 is where we start transitioning from dealing with a lot of legacy issues to getting ahead of the curve," he told an investor meeting.

East said that Rolls recognised the importance of paying a "healthy" dividend to shareholders and the payout would be reviewed for 2016's final dividend.

DIVIDEND CUT

The company said it would pay shareholders a final dividend of 7.1 pence per share compared with the 14.1 pence it paid out last year. It is also halving the interim payout for 2016.

Fears that the company's balance sheet could worsen, however, were allayed. "Our view is we don't need to look at a rights issue," Smith said.

Rolls-Royce had downgraded the 2016 outlook for its main profit driver, the aero-engine business, last July, before warning in November the decline would be bigger than expected as a slowdown in Asian economies hit demand for servicing older aircraft engines.

That added to weakness it was already experiencing in its marine business after energy customers cancelled orders for power systems after a plunge in the oil price.

For 2016, Rolls-Royce stuck to guidance for profit to be 650 million pounds lower than this year.

Analyst expectations for pretax profit are for it to halve to 673 million pounds for 2016 from 1.36 billion in 2015.

East's turnaround plan aims to save 150-200 million pounds a year, streamline top management and improve decision making. Top staff departures have already been announced.

Rolls said on Friday that more management jobs would be cut, in addition to a 20 percent reduction in the top two layers already made since November.

The jump in Rolls-Royce's shares is the biggest daily gain since 2004, but comes after the stock had nearly halved in the previous 10 months.

Analysts at Jefferies said progress was being made.

"We remain optimistic 2016 will show momentum is building, the hurdles are being overcome and, to be blunt, that Rolls-Royce management has control and is growing in confidence," Jefferies analyst Sandy Morris, who rates the stock a "buy" said.

But Hargreaves Lansdown head of research Steve Clayton was less convinced.

"It is too early to say that signs of recovery are visible. The stock is set to be a long haul," he said. (Reporting by Sarah Young; Editing by Mark Potter and Elaine Hardcastle)