It has been a roller-coaster couple of years for shareholders in Rolls-Royce (LSE: RR). As the pandemic hurt demand for air travel, the engine maker’s finances were pummelled. Some investors saw a buying opportunity in battered Rolls-Royce shares.
Here I look at how much I would have made if I had spent £1,000 on Rolls-Royce shares a year ago – and consider what I will do now.
20% return
Investing £1,000 into Rolls-Royce a year ago would have turned out to be a lucrative move for me. In the past 12 months, the shares have moved up by 20%. So I would have made a paper gain of £200 on my stake so far. If I owned the shares today, I could lock in that gain simply by selling them. The company has not paid a dividend in the past year – and does not plan one for 2022, either – so that £200 increase in share price value would be my total return.
Still, even without any dividends, I would be happy with a 20% return in one year. But a year ago there was no way to know what would happen next to the Rolls-Royce share price. There were large risks, such as uncertain timings for civil aviation recovery. There was also the risk of a further liquidity crunch leading to a rights issue diluting existing shareholders. Rolls-Royce has since returned to positive free cash flow, which in my view reduces the risk of a liquidity crunch for now at least. But the timing and scale of future demand recovery in civil aviation remains uncertain. That is a risk to revenues and profits at Rolls-Royce.
Why have Rolls-Royce shares increased in price?
In the past year, the FTSE 100 index of leading UK shares has moved up by 15%. Against that backdrop of a strong market generally, the Rolls-Royce increase looks a bit less impressive.
Still, a 20% increase in a share I owned would have been welcome. What drove this improvement? I think it reflects a shift in sentiment about Rolls-Royce. A year ago, investors were hoping for better times ahead but the company was still facing a tough immediate operating environment. Move forward a year and the engineer has far more attractive cashflows, demand has improved and the benefits of a cost-cutting programme are starting to be seen in its business results.
My next move
Will the Rolls-Royce share price increase 20% in the next year? Nobody knows – that is the nature of the stock market.
I do see reasons for optimism that there could be further upside for the shares. Civil aviation demand will hopefully see further recovery, boosting profitability in a key division of the company. More benefits of the cost-cutting programme will likely show up in the company’s performance. If it sustains free cash flow, investor confidence will improve in the firm’s long-term business model.
However, risks remain, including the possibility of further challenges to demand in civil aviation, something that airline Ryanair recently warned on. For now, I have no plans to add Rolls-Royce to my portfolio.
Should you invest £1,000 in Rolls-Royce right now?
Before you consider Rolls-Royce, you’ll want to hear this.
Motley Fool UK’s Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Rolls-Royce wasn’t one of them.
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Christopher Ruane 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.
