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Every investor holding Rolls-Royce (LSE: RR) shares should be feeling pretty pleased right now. Especially those who picked them up a few years ago.
Shares in the aircraft engine maker are up 130% in a year, and an astonishing 1,760% over five years. That would have turned a modest £3,000 investment into £55,800. It’s the kind of return that changes retirements.
Today, I suspect plenty of holders are staring at their portfolios and wondering: is this as good as it gets?
Bright FTSE 100 shining star
Many have been asking that question for months, yet Rolls-Royce shares kept climbing. They’re up another 8.5% in the past month, even as the FTSE 100 has slipped almost 1%. Momentum keeps drawing in new buyers, but nothing climbs forever. With the stock on a price-to-earnings ratio of more than 55, have we hit peak Rolls-Royce?
On 31 July, we learned that first-half operating profits jumped 50%, allowing the board to upgrade full-year guidance again. Margins widened from 14% to 19.1%. Success creates its own pressures though. Transformative CEO Tufan Ergenbilgic will have to match those high expectations, or Rolls-Royce shares will pay the price.
The company isn’t just about aircraft engines, happily. It has big opportunities in defence, where governments are ramping up spending, and in the nuclear sector.
Last Monday (15 September), Rolls-Royce welcomed a new UK-US pact to accelerate advanced nuclear projects. Erginbilgic reckons the group is the only player with the necessary full lifecycle experience, supply chain and end-to-end capability. It’s already the preferred bidder for Britain’s first Small Modular Reactors.
But can it keep growing?
Nuclear is notoriously expensive and prone to delays, and Rolls-Royce has suffered project overruns before. Other risks include potential supply chain bottlenecks and heavy reliance on airline traffic growth, which could slow if the US slips into a recession.
Common sense says that Rolls-Royce has to come down to earth at some point. Analyst forecasts suggest this could be the year. Their median 12-month price target is 1,219.5p. That’s up just over 6% from today’s 1,150p.
Add a forecast dividend yield of 0.77%, and the potential total return is just under 7%. That’s a far cry from the stellar gains investors have become used to. With the market cap now pushing £100bn, nobody should expect another doubling in a year.
Yet only one out of 19 brokers offering stock ratings says Sell. Thirteen still rate Rolls-Royce a Strong Buy, while five say Hold.
Buy, Hold, Sell, Run?
Selling is a very personal decision. Anyone who bought early and now has Rolls-Royce dominating their portfolio should think about trimming their stake. It’s never wise to be too reliant on one company’s fortunes. But if the holding is modest, I’d be inclined to consider keeping it. This is still a terrific business with long-term growth prospects.
What am I doing? I sold part of my profit on the stock last year, far too soon as it turned out. My remaining stake is a big part of my Self -Invested Personal Pension, but not that big. I’m holding.
I think investors who don’t have any position might still consider buying with a long-term view. But none of us should expect another 1,760% return any time soon.
This story originally appeared on Motley Fool
