Popular Rolls-Royce (LSE:RR) shares will have been high up on the Buy list of many Stocks and Shares ISA investors back in early April. That was when a fresh £20,000 ISA allowance was unlocked.
But how would someone who had put £7,500 into the FTSE 100 engine maker have done so far? Let’s find out.
Cabin crew, please take your seats
The past few weeks have been choppy for Rolls-Royce investors (myself included). This turbulence has been driven by a tug-of-war between strong financial performance and external geopolitical shocks.
The latter, of course, being the ongoing conflict in Iran, which has led to surging jet fuel costs and airlines cancelling flights. As Rolls-Royce’s business model relies heavily on engine flying hours, reduced flight demand threatens this revenue stream.
At the end of April however, the company reassured investors by saying it still expects full-year underlying profit to rise around 17% to at least £4bn.
We have had a strong start to the year across all three divisions. We continue to deliver on our transformation and are proactively mitigating the impact associated with the conflict in the Middle East…Widebody demand remains strong, and we have a young fleet which is growing faster than the market. In addition, business aviation, Defence, and Power Systems are all highly resilient businesses with growth outlooks remaining highly attractive.
Rolls-Royce.
This news has helped push the stock up to 1,198p. Therefore, someone who had invested £7,500 when the new ISA year started a few weeks back would now have roughly £7,700. Some might see that as basically flat, while others might appreciate a £200 return in just a few weeks.
Holders would also qualify for the final dividend of 5p that’s coming in early June. That would add another £32-or-so to the return (Rolls-Royce dividend yield is less than 1% today).
What’s the valuation like?
The fact that management expects to “fully mitigate” the financial impact of the Middle East disruption is clearly welcome news. Presumably, most long-haul flights are being re-routed around the affected airspace.
However, any escalation in the conflict is clearly an ongoing concern. This risk is exacerbated by a high valuation. Based on current estimates for 2026, the stock’s trading at 32.6 times forecast earnings. Any growth hiccup would likely be punished.
As mentioned, the starting dividend yield is also quite low, meaning investors aren’t being paid much to ride out the volatility.
Taking a longer-term view though, I’m still bullish on the stock. Global AI capital expenditure will soon top $1trn a year, and Rolls-Royce’s Power Systems division sells in-demand products that provide back-up power for data centres.
Also, it’s worth pointing out that rival engine maker GE Aerospace is trading more expensively, at a forward earnings multiple of 40. So I wouldn’t say Rolls-Royce’s valuation is bonkers.
Meanwhile, brokers remain overwhelmingly positive on the stock. The latest average 12-month forecast is 1,425p, which is 19% higher than the current level.
Jefferies, for example, reiterated its 1,530p price target on 30 April after the reassuring trading update. And back in March, UBS named Rolls-Royce as a top pick in the European aerospace and defence sector.
Weighing everything up, I think the stock’s worth considering while it’s down 12% from its March highs. But investors should buckle up for more turbulence in the months ahead.
