Rolls-Royce (LSE: RR) shares have had a slow start to 2026, up only about 5%, so far. But the aerospace and defence giant may still have one more trick up its sleeve: small modular reactors (SMRs).
So while the aerospace recovery’s already priced in, is there more opportunity elsewhere?
The turnaround story
I’ve been tracking Rolls-Royce’s extraordinary comeback. From shares at 70p in late 2022, the stock’s surged to 1,265.8p as of 1 June — a 1,614% gain.
The company reported record underlying operating profit of £3.5bn in 2025, up 40% from £2.5bn in 2024. Operating margin improved to 17.3%, hitting its mid-term target three years ahead of schedule.
With a current market-cap of around £107.12bn, it’s now the fifth-largest FTSE 100 company. But where it’s made ground in growth, it lags in income. Its yield remains low, at only 0.8%, after recently reinstating dividends in 2024.
However, that could all soon change.
The SMR angle
Rolls’ SMR angle is often overlooked because it’s in a separate subsidiary and quarterly results focus on aerospace and defence revenue. This means investors often miss the nuclear breakthrough.
Great British Energy selected Rolls-Royce SMR to design and deliver the UK’s first three SMRs at Wylfa, North Wales. In support, the UK National Wealth Fund pledged up to £599m in loan funding.
Meanwhile, in April, Rolls-Royce SMR signed an Early Works Contract with CEZ Group to supply up to 3GW in the Czech Republic — the only company with multiple contractual commitments in Europe.
The global SMR market could reach £500bn+ by 2050, with first power projected to occur in the mid-2030s.
But that doesn’t mean it’s risk-free.
Nuclear challenges
As with any new technology, execution risk’s a key concern. Nuclear projects have a high chance of facing delays. For example, Hinkley Point C took 10 years to complete and significantly exceeded budget. Rolls’ Generic Design Assessment (GDA) approval’s only expected in August this year.
A second major risk is valuation. With much of the stock’s growth already priced in, the average 12-month analyst target implies just a 10% increase. Plus, its aerospace division still makes up 52% of revenue from civil aviation, which could suffer if air travel declines.
Still, the market valuation doesn’t reflect nuclear optionality, which could significantly increase value per share once priced in.
Dividend growth potential
When taking into account the SMR potential, Rolls-Royce could offer 4%-5% yields with utility-like stability by 2035.
| Year | SMR Status | Est. Yield | Dividend Growth |
|---|---|---|---|
| 2026 | Pre-construction | 0.8% | 5% |
| 2029 | Construction | 1.5% | 10% |
| 2032 | First reactor | 2.5% | 12% |
| 2035 | 3 reactors | 4–5% | 10% |
The burgeoning SMR division could transform it into a utility-like dividend gem for the next decade.
Final thoughts
Whether Rolls-Royce’s nuclear sidequest turns out to be a resounding success remains to be seen. It certainly looks promising, but could also face any number of unforeseen obstacles along the way.
However, one thing’s for sure: Rolls is now a 2-in-1 stock. It’s an aerospace turnaround story (already priced in) plus nuclear utility optionality (long-term dividend potential).
For UK investors, that makes it one of the FTSE 100’s best dividend growth prospects. If you’re building a retirement portfolio in an ISA and Self-Invested Personal Pension (SIPP), this new angle deserves a closer look.
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Mark Hartley does not hold any positions in the companies mentioned.
