With the Stocks and Shares ISA deadline (5 April) fast approaching, I have been looking for growth stocks to buy for my portfolio.

I have been looking for high-quality corporations with the potential to expand rapidly over the next couple of years. Here are three companies that I think meet my criteria. 

Undervalued growth stocks

International Personal Finance (LSE: IPF) provides credit services to consumers in the UK and internationally. The firm’s profits slumped during the pandemic as it was forced to write off some loans to customers. However, growth may return over the next two years.

Based on current City estimates, the stock is trading at a forward price-to-earnings (P/E) ratio of just 5.8. Further, earnings per share could grow by 26% this year. Based on these numbers, the stock looks cheap compared to its growth potential. 

Still, the last two years are a warning for investors. A sudden spike in loan losses could decimate the corporation’s bottom line. Shareholders may have to foot the bill if it needs to raise more capital to strengthen the balance sheet.

As such, while I would buy this company for my Stocks and Shares ISA as an undervalued growth investment, I will be keeping an eye on the potential challenges it faces going forward. 

Aside from these risks, analysts also believe that the corporation can pay out a 6.2% dividend yield for its 2022 financial year. So not only does the company appear cheap compared to its growth potential, but it also has strong income credentials. 

Stocks and Shares ISA buy 

Another undervalued growth stock I would buy for my portfolio is the news publisher Reach (LSE: RCH). Over the past couple of years, this business has been moving away from its legacy print news business towards online journalism. The transition is just starting to yield results. 

After a mixed couple of years, the firm is expected to report a net profit of £116m for its 2021 financial year and £117m for fiscal 2022. Based on these estimates, the stock is trading at a forward P/E multiple of 6.4.

I think this figure looks incredibly cheap compared to the company’s growth potential over the next few years. Analysts also reckon the enterprise has the potential to pay a dividend yield of 3.1% in the current year.

Despite these optimistic forecasts, Reach does face some challenges. The online news business is incredibly competitive. Its revenue is also dependent on advertising income from the tech giants, which could disappear at a moment’s notice. If this vital revenue stream is closed down, the firm may struggle to survive. 

Nevertheless, considering Reach’s current valuation, I believe the stock could make a great addition to my Stocks and Shares ISA as an income and growth stock. If the company continues to reinvest in its operations and build an increasing readership base, I reckon profits will continue to grow. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I am always looking for growth stocks that may have fallen out of favour with investors. The market can be incredibly fickle, and it is often quick to dump a business if it has not lived up to expectations. This can lead to fantastic opportunities for investors like myself, who are not particularly bothered about a company’s short-term performance. 

With that in mind, here are two growth stocks currently trading at 52-week lows that I would buy for my portfolio today. 

Growth stocks with further potential

The first company is the online stockbroker Hargreaves Lansdown (LSE: HL). This corporation has revolutionised the online trading market in the UK over the past couple of decades. As consumers have flocked to its low-cost offering, profits have jumped from £177m in 2016 to nearly £300m for 2021. 

Unfortunately, the company has warned that growth could slow in the years ahead. According to management, increasing competition in the market and less volatility (meaning investors do not have as many opportunities to trade) could hit overall profitability. 

Based on these challenges, the market has been selling the stock recently. However, I think this presents an opportunity to acquire a market leader at a discounted price. The stock is currently trading at a forward price-to-earnings (P/E) ratio of 24, below the group’s five-year average of around 30.

I think this multiple undervalues the company and its potential, which is why I would be happy to buy this growth stock for my portfolio today. 

International expansion

I would also buy premium mixer brand Fevertree (LSE: FEVR) for my portfolio of growth stocks.

The stock is currently trading just above its 52-week low, which presents an attractive opportunity. Indeed, the company is still growing, although it is just not growing as fast as the market believes it should. 

After a rocky 2020, when earnings per share declined 30%, the corporation has been struggling to rebuild its international presence. Nevertheless, with total sales of just £310m, I think the enterprise has tremendous potential. It represents a tiny fraction of the global beverage market, leaving plenty of room for growth in the years ahead. 

Challenges the company could face in the next few years include inflationary pressures. These could hit profit margins and hold back growth. Consumers may also trade away from the brand seeking lower-cost alternatives. 

Despite these headwinds, I think the stock looks attractive as an investment for the next couple of decades at current levels. It has a cash-rich, debt-free balance sheet to support its growth ambitions, and there is plenty of scope for the group to expand into new markets. There has also been a recent notable trend of consumers upgrading to premium drinks and spirits. The company could benefit from this tailwind over the next few years. 

After recent declines, it looks to me as if the market does not appreciate Fevertree’s strong brand and expansion potential. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Improving economic optimism is pushing the share prices of many cyclical FTSE 100 shares through the roof. BP (LSE: BP), for example, has risen an impressive 48% in value during the past 12 months. Lloyds Banking Group (LSE: LLOY) and Tesco (LSE: TSCO) have also jumped 38% and 27% respectively since this point last year.

I wouldn’t rule out more gains for these FTSE 100 shares as the global economy steadily recovers from the pandemic. But as someone who invests with a long-term view, I won’t touch any of them with a bargepole. Allow me to explain why they’re far too risky for me.

Will crude prices sink?

It shouldn’t be a surprise that BP has been the strongest performer of these three FTSE 100 shares. Soaring energy demand has sent crude prices through the roof, the Brent index reaching its highest since 2014 early this week. BP’s profits rocketed to $4.07bn in the fourth quarter of 2021, from $115m a year earlier, thanks to the oil-price boom.

They could continue rising as well in the near term on huge supply shortages. After all, the IEA recently upgraded its forecasts for oil consumption in 2022. But I won’t buy BP as I worry about what prices the oil major will receive for its product several years from now.

Fossil fuel investment in non-OPEC countries has ballooned in recent years, while progression on a nuclear deal between the US and Iran could flood the market with supply too. I also think growing demand for renewable energy could sink BP’s profits as worries over the climate emergency worsen.

Rising competition

Tesco is Britain’s biggest retailer and has the financial might to invest in its operations. It also has the biggest online shopping operation in the business which will allow it to capitalise on the e-commerce revolution. But I fear that profits could struggle as consumer spending comes under increasing pressure and people flock to value retailers such as Aldi and Lidl.

I also fear for Tesco because competition in the UK grocery sector continues to hot up. Last week, for example, popular value retailer Poundland announced it was dipping its toe into the fresh food category.

Rapid expansion by the aforementioned German discounters, and huge investment on the high street and online by Amazon, already pose huge threats to long-term profits. Not to mention massive threats to future margins as Tesco may have to slash prices more aggressively to compete.

Will Lloyds’ share price slump?

The Lloyds share price has risen strongly on hopes of big interest rises. In fact, a backcloth of runaway inflation has raised expectations of rate hikes to boost the profits banks make as lenders. Many commentators now expect the Bank of England benchmark to end 2022 at 1.25%, up 1% from January.

But I fear the advantage of higher interest rates to Lloyds is outweighed by the implications of Britain’s struggling economy. I think UK-focussed banks like this could face a wave of bad loans as the cost of living rises and businesses go to the wall.

It’s likely that revenues would struggle amid a long and broad economic downturn as well. I also think Lloyds could struggle in the years ahead as challenger banks chip away at its customer base. These digital-led entrants now hold an 8% market share in the UK, the FCA says.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Lloyds Banking Group, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If I had a lump sum of £5k to start investing with today, I would follow the advice of Warren Buffett.  Generally considered the best investor of all time, the billionaire has a few strict rules when it comes to buying stocks. He will only invest in a company he understands, and he will only buy profitable businesses. 

These rules do limit the number of companies he can look at. But that is the point. Buffet knows he cannot possibly analyse every business on the market, so he does not try. Instead, he focuses his time on corporations he knows the best. 

Buffett likes to focus on high-quality businesses. These tend to be firms with a strong competitive advantage that can be used to outperform the competition. He is also looking for companies with robust balance sheets and long runways for growth ahead of them. 

I would follow this road map to invest a lump sum of £5k in the stock market today. 

Warren Buffett stocks 

I believe a handful of businesses currently fit into this framework. One firm that immediately stands out to me is industrial machine designer and producer Renishaw. This company manufactures equipment for the highly specialised technology and industrial sectors. It has a commanding position in the industry and an excellent reputation with its customers, by all accounts. 

Renishaw’s reputation alone is the company’s most significant competitive advantage. Its clients are not going to want to spend money on sub-standard equipment. So they are prepared to pay a premium for this group’s experience. That is why I believe the establishment has all the hallmarks Buffett looks for in an investment. 

Unfortunately, the company’s competitive advantages are not guaranteed. As is the case with all businesses, Renishaw will need to keep investing to stay ahead of the competition. It cannot take its position in the market for granted. If the enterprise starts to neglect its customers, sales could fall. This is the biggest challenge the group will face going forward. 

Growing business 

I also believe distribution group Bunzl has Buffett-like qualities. This company’s competitive advantage is its size. It operates in the distribution sector, which tends to have razor-thin profit margins. In this market, size counts. And the corporation certainly has the size and the scale required to outperform its smaller peers.

It has a great track record of complementing organic growth with bolt-on acquisitions, and management has identified enough new acquisitions to support growth for the next couple of years. Like Renishaw, Bunzl will also have to make sure it keeps investing enough in growth, or the competition could leave it behind. 

Considering these qualities, I would invest £2,500 each in these Buffett-style companies. I think these businesses are some of the best corporations on the London market, and I would like to be part of their growth story. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl and Renishaw. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When I am looking for the best shares to buy for dividend income from my portfolio, I like to concentrate on FTSE 100 stocks.

There is a reason why I look to blue-chip equities over other sections of the market. I believe most large-cap companies have stronger balance sheets and more sustainable competitive advantages than their small peers.

The best shares to buy for income

These are essential qualities when searching for income investments. Companies with strong balance sheets and sustainable competitive advantages should be able to return more cash to their investors in the long run. 

Of course, this is not always correct. Just because a company is trading in the FTSE 100 does not necessarily mean investors should take its dividend for granted. Indeed, there are any number of reasons why a corporation could cut its dividend payout. Higher interest rates, rising costs, or a sudden decline in corporate profitability, could force a business to reduce its payout.

Still, I believe the FTSE 100 is a great starting point to look for potential dividend ideas. And with that in mind, here are my best shares to buy for dividend income in the FTSE 100 today. I would add all of these companies to my portfolio today.

FTSE 100 stocks

The first enterprise on my list is the pharmaceutical giant AstraZeneca. Made famous for its coronavirus vaccine, the company’s related business is just a small part of the overall enterprise. The group’s cancer and oncology business is far more important, in my eyes. This is set to be a major growth engine for the firm. 

Considering its position in the relatively defensive healthcare industry, I think Astra is a fantastic income investment. At the time of writing, the stock supports a dividend yield of 2.6%. The distribution is covered 2.3 times by earnings per share, leaving headroom for expansion in the years ahead. 

Another of the best shares to buy in the FTSE 100 today for dividend income, in my opinion, is homebuilder Persimmon. With a dividend yield of 9.6%, at the time of writing, and a debt-free, cash-rich balance sheet it looks to me as if this payout is here to stay. The company has more than £1.3bn of cash on its balance sheet, which should provide more than enough headroom to both maintain the dividend and invest in growth. 

Growth potential

A final company that really stands out to me as one of the best shares to buy now for income in the FTSE 100 is Airtel Africa. The telecommunications and mobile money services enterprise operates an expanding business across Africa.

The stock currently offers a dividend yield of 3%, and the payout is covered 2.5 times by earnings per share.

It is also investing heavily to expand its footprint, which should help drive earnings growth in the years ahead. I believe this could translate into further dividend growth.

All of these companies exhibit the qualities I am looking for in the best shares to buy now for dividend income. With their strong balance sheets and growth potential, I think these businesses have the potential to increase their distributions in the years ahead. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As an investor in Unilever (LSE: ULVR), is my investment going anywhere? Over the past year, the Unilever share price has fallen 3%. In a way that is not surprising. Spiralling inflation and its possible negative impact on profitability have frightened investors away from consumer goods companies.

But what I find more alarming is that, over the past five years, Unilever shares have basically been flat. They are just 2% higher now than they were exactly five years ago, in the week when Warren Buffett was part of a takeover bid for the company.

That flat performance does not sound attractive to me – what is going on?

Flat revenue but growing earnings

I think the main reason Unilever shares have barely moved is that the company does not have an exciting growth story to motivate shareholders. In its final results last week, revenue grew 3.4% compared to the prior year. But it was still slightly down on where it stood five years ago. The company looks like a supertanker, large but going nowhere fast.

Cost control and a focus on profitability have helped improve earnings. Direct comparisons are complicated by the company’s shifting measures, but diluted underlying earnings per share of €2.62 compared favourably to diluted earnings per share of €1.88 five years ago.

Dividend rise

It is also worth remembering that Unilever pays a dividend. So while the shares have seen limited capital gain over the past five years, shareholders have at least benefitted from receiving a regular dividend.

Currently the yield is 3.8%. I think that is quite attractive. Rival Reckitt yields 2.8% and I think Unilever has a more attractive business overall. Last week, Unilever announced that its annual dividend would increase by 3%. That is not massive, but it is more than tokenistic. With its proven ability to generate massive cash flows and a yield close to 4%, the passive income potential of Unilever helps it merit a place in my portfolio.

Possible drivers for the Unilever share price

The company’s collection of premium brands and global footprint make it an attractive business. After its own failed attempt to bid for part of GlaxoSmithKline recently, I would not be surprised if Unilever itself became a bid target at some point. Warren Buffett – not someone associated with overpaying for companies – offered £40 a share. Today, Unilever shares continue to languish beneath that level.

But I would not buy a company just because I think it could attract takeover attention. Unilever has fiercely maintained its independence. What I like about Unilever is its business. A portfolio of premium brands give it pricing power. That can help generate large free cash flows, even at a time like now when cost inflation threatens profit margins. The pricing power allows Unilever to offset that risk by increasing what it charges customers.

There are risks to the Unilever share price, too. Its global business means exchange rate movements could hurt its profits. Its lacklustre growth momentum suggests it may struggle to grow revenues strongly. It is targeting underlying sales growth of 4.5%-6.5% this year.

But I continue to see this as an attractive business with a strong competitive advantage in the form of its brand portfolio. Earnings have grown along with the dividend. I do not see my Unilever shares as dead money, because I remain modestly optimistic about the company’s prospects.

Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended GlaxoSmithKline, Reckitt plc, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I firmly believe investing in stocks and shares is one of the most straightforward ways of building a passive income for life. And I think it is possible to get started with a simple investment of just £10 a week. 

Building the pot

Such an amount each week might not seem a tremendous outlay. However, these small contributions can add up over time.

This weekly monthly sum equates to £520 a year. If I invest this figure in a portfolio of dividend stocks yielding between 7% and 8% per annum, I could achieve an annual passive income of nearly £42. Not a amount, but it is a start. Investing is a marathon, not a sprint, after all. 

In investing, the real money is made in the long term. Indeed, according to my calculations, if I continue to invest £520 a year for 10 years and reinvest all of my income, I could build a nest egg worth nearly £8k. This could potentially generate an annual passive income of £640. 

If I increase my weekly contribution, a much bigger pot would be possible. Of course, I could also lose money if my investments don’t work out as I hoped because I know my capital is always at risk. 

My figures show that if I double the monthly contribution, I can build an investment account worth £15k. A pot of this size could generate £1.2k in passive income every year. If I can put away £50 a week, or £2.6k per annum, I could build a £40k nest egg. This could produce £3.2k per annum in passive income. 

The longer I can save, the more money I can earn. If I can save £2.6k per year for 20 years and make an 8% return per annum, after two decades, I would have £123k in investments. The potential here is to generate nearly £10k in passive income every year. 

Passive income potential

Of course, there is no guarantee I will earn an 8% return on my money every year. I could even earn nothing or lose money. My figures only illustrate the potential returns from this strategy over the next couple of decades. Nevertheless, it is a strategy I am following and intend to keep following for the foreseeable future. 

Some of the best dividend stocks on the market at the moment, in my opinion, are Direct Line and Rio Tinto. These companies support prospective dividend yields of around 7% and 13% respectively. That gives an average dividend yield of 10%, above my 8% projection in the example above. 

As company dividends are paid out of profits, they are not guaranteed. A sudden decline in profits could force an enterprise to reduce its dividend payout. 

Still, I think the level of income on offer from these two companies shows how it is possible to build a passive income stream by using stocks and shares with an investment of just £10 a week. All it requires is a disciplined and consistent investment strategy. And a bit of patience. 

Rupert Hargreaves owns Direct Line Insurance. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It has been a rewarding time to be a shareholder in banking giant Lloyds (LSE: LLOY). Over the past year, the company’s shares have moved up 37%. Partly this investor enthusiasm is explained by expectations for growth in the Lloyds dividend. With the bank set to announce its full-year results on Thursday, could positive news about the dividend push the shares up still further?

Potential for the Lloyds dividend

In the pandemic, Lloyds and other British banks were forced to suspend dividends by their regulator. Last year, Lloyds brought its dividend back, but at a much lower level than before. Arguably that was due to an abundance of caution. But as a shareholder I feel it was a disappointing move.

Meanwhile, the company has continued to grow its pile of excess capital. Banks need a cushion of excess capital to help maintain their liquidity when the banking system faces heightened risks. But I am not a fan of banks sitting on substantial excess capital, as history is littered with examples of them frittering it away on poorly considered acquisitions. Instead, I prefer banks such as Lloyds to pay out excess capital to shareholders as dividends. The bank has stated that it has a progressive dividend policy, which means it hopes to keep increasing its payout. However, that is never guaranteed.

Lloyds results due

On Thursday, Lloyds is due to announce its full-year results to the City. Based on what we saw in the first three quarters, I expect a strong set of results. There are risks, though. The company’s huge mortgage book means its profits can be hurt by any downturn in the housing market. Inflationary pressures such as soaring energy costs could also increase the expected default rate among borrowers, hurting profits.

Among the other news, Lloyds will announce its proposed final dividend for 2021. Given its cash pile and trends in the sector, I am optimistic about this. Yesterday, for example, rival Natwest announced that it plans a final dividend of 7.5p per share, compared to 3p per share last year. If Lloyds increased its final dividend at the same rate, its yield would jump to 4%.

Will the Lloyds dividend increase?

However, we will not know until Thursday what Lloyds plans for its dividend. I feel it was cautious in restarting its dividend at the low level it did. So I am not expecting it to announce the sort of blockbuster increase we saw at Natwest. If it does, I would be happy as a shareholder – but I would see it as a welcome surprise.

Expectations of strong dividend growth are already built into the Lloyds share price in my view. That partly explains its surge over the past year. A meagre increase could actually lead the shares to fall, in my opinion. I think investors would be more welcoming of a sizeable increase. But, with expectations already high, I do not expect that to lead to a big jump in the Lloyds share price unless Thursday’s dividend news is really strong.

I continue to hold Lloyds. But I am not expecting this week’s dividend news to increase the value of my holding substantially. Instead, I am holding the shares for their continued long-term potential.

Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Royal Mail (LSE: RMG) share price enjoyed a great 2021, with the FTSE 100 stock rising 50%. However, 2022 has not repeated this form, with nearly 20% year-to-date being shaved off the gains made last year. 

So, after its impressive rise, and current dip, would Royal Mail be a good buy for my portfolio today? Let’s take a look.

Why has the Royal Mail share price fallen in 2022?

One of the reasons for the fall in price this year is due to the delivery delays the business was experiencing last month. Staff shortages due to the pandemic, as well as high demand around the Christmas period, meant customers nationally were not getting their post on time.

However, the share price stabilised after the release of its Q3 update in late January. Where, although domestic parcel revenue rose compared to pre-pandemic levels, it missed the mark when compared to 2020 figures.

Would I buy?

So, should I be buying the stock? Well, one factor that draws me to Royal Mail is the strides the firm is taking regarding restructuring and streamlining. As my colleague Zaven Boyrazian highlighted, Royal Mail announced its plans to cut 700 managerial positions through the company. While this is without doubt unpleasant for the impending ex-employees, the move is expected to provide £40m in annualised savings from 2023 onwards.

In the short term, this move will come at a cost. The price of sacking these employees could reach £70m. And, as such, Royal Mail has cut operating profit guidance from £500m to £430m. This impact on the firm’s profits may have negative connotations for the Royal Mail share price for the foreseeable future.

Yet, another factor that attracts me to Royal Mail is its low price-to-earnings (P/E) ratio. The business currently has a P/E of under five. And compared to its global rival FedEx (12.3), this tells me that Royal Mail is currently undervalued.

I also like the direction Royal Mail is taking with its GLS division. Management has plans to increase the size of the division, with a target of increasing its operating profits to €500m by 2024-2025. Last year it acquired Canadian firm Rosenau Transport to help meet this aim.

With this said, it must be noted that this expansion has the potential to be costly, and should it fail to meet these targets this could incur big costs for the business. This would most certainly hurt the Royal Mail share price.

Nevertheless, I like the direction the firm is taking. And should it be able to execute these moves effectively, I think we could see a rise in the Royal Mail share price. The business is currently undervalued. And although it may face headwinds in the near future, as it streamlines its operations, I think in the future this will pay dividends. As such, I would be willing to add Royal Mail to my portfolio today.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The last time the Rolls-Royce (LSE: RR) share price changed hands for 200p was in March 2020. That was just before the coronavirus pandemic shut down the global economy. 

Since then, shares in the group have traded between 140p and 90p although, at one point, the stock dropped below 39p. 

However, I think there is a growing chance shares in the aerospace giant could return to 200p in the next 12 months. There is one particular catalyst I believe could drive a significant re-rating of the stock.

Rolls-Royce share price outlook

In many ways, this company is both a recovery story and a growth play. Of course, the firm needs the civil aviation industry to return to 2019 levels of activity for earnings to recover.

But on the other hand, its presence in the nuclear sector, particularly the small modular reactor market, makes this company an attractive growth stock for the next decade and beyond. 

Thanks to these potential twin catalysts, I think the outlook for the Rolls-Royce share price is looking up. Unfortunately, it is unlikely the stock will return to pre-pandemic levels unless a significant catalyst emerges that pulls investors back to the business. 

I think this is likely to be the company’s cash generation. What I mean by this is that the business has long been promising it will earn a positive cash flow this year.

If it does, it will remove one of the most considerable question marks hanging over the stock since the beginning of the pandemic. Will Rolls run out of money?

When the enterprise is cash-flow positive, it will be able to stand on its own two feet. This will also free up more money for the enterprise to invest in growth initiatives, such as its nuclear business, and chase new customers. 

Something else investors need to consider is the company’s credit rating.

Market sentiment

When an aircraft manufacturer buys an engine from Rolls, it is doing so on the understanding that the engineer will still be around in five or 10 years time. Every unit is sold with a multi-year service contract. This is where the company makes the real money as each engine is sold at cost.

Buyers of the units need to trust that the corporation will be around to meet its obligations. If they doubt its ability to survive, they may postpone orders or seek out another manufacturer. 

This is why the company’s cash position is so fundamentally crucial for the Rolls-Royce share price. If its customers believe the group is struggling to survive, they might stop placing orders. 

Still, there is no guarantee the organisation will meet its cash targets. Further economic disruption could destabilise the organisation’s return to growth. 

I would acquire the company for my portfolio as a speculative play despite this risk factor. Indeed, I estimate that if the corporation hits its cash flow projections, it could earn an annual free cash flow per share of around 10p in the next couple of years.

In 2019, the stock traded at a multiple of around two times free cash flow. A return to this valuation would justify a price of 200p, or more, an increase of nearly 70% from current levels. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.