The Stocks and Shares ISA is one of the most powerful wealth-building tools available to UK investors. And those who used one to put money to work back in July 2020 are now potentially sitting on a huge tax-free gain.
Historically, the UK stock market delivers close to an 8% annualised total return. But since July 2020, that figure has been closer to 13.3%. That means a simple £7,000 investment in a FTSE 100 index tracker has grown to around £14,782 today.
Doubling your money isn’t bad at all. But for some investors, the returns have been on another level entirely.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
From £7,000 to £100,000+
Rolls-Royce (LSE:RR.) is the most striking example of parabolic returns over the last half-decade. Since July 2020, the engineering giant has delivered a staggering 1,368% return, largely under the transformational leadership of CEO Tufan Erginbilgiç. That means a £7,000 initial investment is now worth around a jaw-dropping £102,760!
As it turns out, buying when the market was in full panic mode about the pandemic and Rolls-Royce’s finances proved to be, for some, the opportunity of a lifetime. But now, with the FTSE 100 and the Rolls-Royce share price both sitting near all-time highs, the question has naturally shifted. Is there still room to run?
The bull case is still credible
Rolls-Royce’s latest trading update from April was genuinely encouraging. Large engine flying hours grew 5% in the first quarter to 115% of 2019 levels. Defence OE deliveries surged more than 20% year-on-year, while Power Systems posted a 50% jump in power generation order intake, leaving the division sitting on a £7.3bn order backlog.
Full-year 2026 guidance for underlying operating profit of £4.0bn-£4.2bn was reaffirmed, and with £750m of the £2.5bn 2026 buyback tranche already completed. And to put a cherry on top, credit rating agencies Moody’s and Fitch both upgraded Rolls-Royce to investment grade – a clear signal that the pros believe the balance sheet is finally in a strong spot again.
The long-term runway also remains compelling. Mid-term targets for 2028 were upgraded for the second consecutive year, pointing to between £4.9bn and £5.2bn of underlying operating profit. And the recently signed contracts for small modular reactors at Anglesey and in the Czech Republic signal an entirely new long-term revenue stream beginning to take shape.
So can the momentum continue?
With so much already priced in, the bear case is primarily one of valuation. At today’s price, Rolls-Royce trades on a forward price-to-earnings ratio of around 37. What’s more, the average analyst target of 1,425p sits just fractionally above today’s price, implying the consensus view is that most of the upside has already been captured.
That doesn’t mean the stock can’t keep climbing. But it does mean the slightest operational hiccup could be enough to spark significant volatility. And with continued escalation of the conflict in the Middle East alongside ongoing supply chain disruptions, this is a very real risk.
What’s the verdict?
Rolls-Royce remains one of the most exciting business transformations in recent UK corporate history. But adding shares to a Stocks and Shares ISA at today’s valuation doesn’t look like the greatest of investments compared to other opportunities within the aerospace sector.
That’s why I’m keeping Rolls-Royce on my watchlist for now, until a better price emerges.
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Zaven Boyrazian does not hold any positions in the companies mentioned.
