Owning shares in Rolls-Royce (LSE: RR) in 2022 has been a disappointing experience. Since the start of the year, Rolls-Royce shares have lost 28% of their value. They now trade for pennies.
However, I think next year might be more rewarding for me as a Rolls-Royce shareholder. Here is why.
Aviation recovery
2022 has seen a sharp increase in the number of passengers at many airlines, such as easyJet and British Airways. BA’s parent IAG plans to keep increasing capacity heading into 2023. That suggests it expects passenger demand to edge closer to pre-pandemic 2019 levels. Meanwhile, in regions of the world such as east Asia, travel controls are increasingly being relaxed.
All of that points towards a strong 2023 in terms of passenger demand for commercial aviation. That is good news for Rolls-Royce. It has a large installed base of engines and more flying hours equals greater demand for servicing. On top of that, as airlines see soaring demand, they are more likely to consider ordering new planes. That could lead to an increased order book for engines.
Could its shares benefit?
Those trends have already been obvious for some time. Although Rolls-Royce shares have fallen 19% in a year, over the past two months they have shot up more than 40%.
However, that still leaves them trading for less than they were a year ago. But I think business prospects now look better than they did then. The company’s balance sheet is also in better shape, thanks to money the company raised by selling assets to pay down debt.
I think that could help the share price grow in 2023.
Dividend outlook
On top of that, 2023 could see good news on the dividend front. Rolls-Royce used to be a decent dividend payer, but it stopped paying out due to the pressures put on its business by the pandemic. The engineer borrowed money to boost its liquidity and part of the loan conditions included a prohibition on the company paying dividends – until 2023.
But that does not necessarily mean the company will pay dividends next year. Under the loan conditions, it needs to meet certain criteria to do so. Even if the company is able to pay a dividend, its directors may decide that that is not a priority as it seeks to rebuild its financial strength. After all, post-tax profit of £124m last year was fairly small, given that turnover topped £11bn.
My move
Even if no dividend is declared, the mere prospect of one may increase investor interest in Rolls-Royce shares.
I also think growing demand in commercial aviation could help boost sales and profits at the firm. On top of that, I expect continued strong performance from its defence division as governments in Europe and North America boost spending.
Inflation is a risk to profitability. A weakening economy could also lead to passenger demand falling again, perhaps leading sales to slow down.
On balance, I think Rolls-Royce is in better shape than it was 12 months ago. Despite that, its shares are now cheaper to buy. I do not plan to buy any more in order to keep my portfolio sufficiently diversified. But I will hang on to those I own.
