Over the past few years, Rolls-Royce (LSE: RR) has left most other FTSE 100 shares in the dust. While the index is up by 54% over that period, Rolls-Royce shares have gone up by 1,311%.
Sometimes, when looking at a company that has put in a brilliant performance, an investor may think that it is too late to hop onboard.
In reality, though, when a company does well and its share price increases, it can potentially be a harbinger of things to come.
So, how has Rolls-Royce been doing lately – and ought I to buy some shares in the aeronautical engineer for my portfolio?
From strength to strength
In short, the business continues to do well – and that has been reflected in a powerful share price performance.
Take the past year as an example. During that period, the FTSE 100 is up by 20%. For an index of well-established blue-chip companies, many of them mature, that is a strong performance in my view.
But Rolls-Royce shares have done over twice as well in the same period, with the price gaining 43%. So a £500 investment one year ago would now be worth around £715.
That reflects Rolls’ continuing delivery on investors’ expectations. It has not changed its outlook for this year’s financial performance despite the impact on civil aviation demand that has resulted from the Middle Eastern conflict.
Could this go further?
On top of the price gain, someone who invested £500 a year ago would also have received around a fiver in dividends over the past year. The current 0.7% dividend yield is not very exciting, but the payout could grow over time if earnings move up.
The main potential attraction of this share to me, though, lies in the potential for further price appreciation.
Is that likely, or even possible?
The business is benefitting from strong demand in all three of its key focus areas: civil aviation, defence, and power systems.
It is also benefiting from a more stringent approach to cost control than it once had and has consistently set and achieved or beaten challenging financial targets.
Still, at 48 times earnings, I think Rolls-Royce shares look expensive.
I’m staying on the sidelines at this price
Just because the share looks expensive, does not necessarily mean that it might not go even higher.
Rolls’ ongoing business performance improvement could push earnings up, making the prospective valuation more attractive.
Plus it is popular with investors not only because the business has been performing well but also because it is positioned to benefit from some popular investing themes right now, such as defence and nuclear power.
But when investing, I like to feel I have a margin of safety. Given the current valuation, I do not feel Rolls-Royce shares offer me that.
With many airlines reporting weaker passenger demand, I expect that to feed through to airlines’ appetite for spending on new aircraft sooner or later.
That risk alone means that, at the current share price, I will not be investing in Rolls-Royce.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
