Rolls-Royce (LSE:) shares are the UK’s answer to US chipmaker Nvidia. They’ve delivered stellar share price growth and now everybody is asking the same question of both. How long can this go on?
I timed my purchase of Rolls-Royce shares beautifully, buying them in October 2022 just as they were revving their engines prior to take off. It’s the selling bit I got wrong.
With my shares up 179% in a year, I decided to follow the old investment adage that “it’s never wrong to bank a profit”. In truth, I’ve never bought into that saying. It feels like a way of rationalising a bad decision. Now I’m even less convinced. Rolls-Royce shares are up another 70% since I sold and just won’t stop. They’re up 20% in the last month.
I sold this stock too early
Somebody who had invested £10,000 one year ago would have £25,500 today, a rise of 155%. If they’d had the prescience to buy two years ago, their £10k would be worth a staggering 345% more, or £44,500.
I’m only running these figures to torture myself. The one question that matters today is whether Rolls-Royce shares can continue to outperform, or whether I can find a better stock to buy.
The first thing I should say is that there’s no definitive answer. When it comes to investing, there never is.
Yet the continued share price rise is backed by some incredible numbers. Full-year 2023 underlying operating profit more than doubled from £652m to £1.6bn. Markets had expected £1.4bn. And flying hours still haven’t returned to pre-pandemic levels.
CEO Tufan Erginbilgiç has set ambitious targets for 2028, including an increase in cash inflows from £1.3bn in 2023 to £3.1bn, with return on capital jumping from 11.3% to 18%.
The numbers are strong
The problem with setting ambitious targets is that markets will punish a company if it falls short (even if it does pretty well). The stock trades at 28.36 times earnings, and a lot of that growth is already priced in. Erginbilgiç has turned into an overnight FTSE 100 superstar CEO, but that brings as many risks as rewards.
That said, the case for Rolls-Royce still looks strong. Dividends will resume in 2024. Initially the yield will be low at 06.3%, but that will rise as expected to rise to 1.02% in 2025, and with luck carry on climbing.
A few years ago, investors were fretting over Rolls-Royce’s debt mountain. Now it’s a mole hill. It fell again in 2023, from £3.3bn to £2bn. In 2024, markets expect it to shrink to a mere £65m. In 2025, it’s forecast to be cash positive to the tune of £1.45bn.
I still think there is a good bit of froth mixed up with the Rolls-Royce share price today. How can there be anything else? Murphy’s law suggests the shares will fall if I buy them, which could wipe out my earliest profit. I won’t buy Rolls-Royce shares today. If they dip though, I’ll pounce.
This is a great British company again, and I want it in my portfolio but at a decent price. I may have to be patient, and torture myself a bit more.
This post was originally published on Motley Fool
