The buy back of shares will use the proceeds from the agreed sale of its gas turbines and compressors energy business to Siemens.
Shares jumped 6% today after the announcement and as Rolls reassured investors that it remains on track to meet targets for this year and next.
Rolls, which has major bases in Bristol and Derby, recently warned that profits will fail to grow this year due to the impact of defence spending cuts among major customers.
And it was dealt a £2.6 billion order book blow last week when Dubai-based airline Emirates scrapped plans to buy 70 Airbus A350s.
Completion of the £785 million deal with Siemens is expected by the end of the year and will trigger the payment to shareholders.
Chief executive John Rishton said: "As no material acquisitions are planned, and reflecting the strength of our balance sheet, we will return the proceeds of the energy sale to our shareholders".
Cantor Fitzgerald analyst Andy Chambers said the buy-back came as a surprise and would end any fears that Rolls planned to revive its interest in Finnish marine engineer Wartsila, which has a market value of around £6.5 billion.