Rolls-Royce (LSE: RR) shares got a lot of attention in 2020. In fact, the stock appeared consistently within the top 20 most purchased and sold shares on the Hargreaves Lansdown platform last year. It seems many investors were uncertain over the company’s prospects.
Here are five things I think investors like me should know before buying Rolls-Royce shares in 2021.
#1 – Coronavirus victim
Rolls-Royce has clearly been a victim of the coronavirus pandemic. The firm’s Civil Aerospace business, which accounted for over 50% of 2019 revenues, was hit badly.
This division is responsible for the manufacturing and servicing of engines for the airline industry. Due to the coronavirus lockdowns, there was a lack of travel and hence the airlines halted flights. This in turn reduced the need for Rolls-Royce’s services.
#2 – The bounce-back
Since the pandemic started in March 2020, much has changed. We now have several vaccines that have been approved by UK regulators. I now believe, like many others, that there is light at the end of the tunnel.
Despite the rollout of vaccines, things will take time to return to normal. But I believe that once the UK has successfully vaccinated most of its vulnerable people, stocks such as Rolls-Royce shares will see a bounce-back.
A successful vaccination process will ultimately mean fewer hospitalisations and deaths and the reduction of measures such as social distancing. This means that air travel will start to climb back towards pre-crisis levels, improving the prospects for Rolls-Royce shares.
#3 – Quick action
During the pandemic, Rolls-Royce’s management team responded quickly. It implemented measures so that the company could weather the coronavirus storm.
In such times, a company needs access to liquidity. This is exactly what Rolls-Royce got. It raised money from a rights issue, secured additional loans and drew upon its existing cash reserves. For me, the fact that Rolls-Royce successfully raised capital from the rights issue highlights that investors believe the company can get through this tough period.
Rolls-Royce took further measures by implementing cost-cutting measures and disposing of certain assets. These steps have not only made the firm leaner, but have also strengthened the balance sheet.
While Rolls-Royce may need further capital in the future, I’m comforted by the fact that it’s unlikely to go bankrupt in the short term.
#4 – Defence contracts
It’s not all about the Civil Aerospace division. Rolls-Royce generates 20% of its earnings from defence contracts with the UK and US governments.
The defence business has remained resilient during the pandemic. It has a strong order book and 2021 forecast sales are well covered. For now, I’m happy with the stable revenue visibility from this division.
#5 – Looking forward
I believe the fundamental drivers behind long-term global commercial air travel remain intact, which in turn is good for Rolls-Royce shares. The company is on target with its plans to battle the coronavirus slowdown. Rolls-Royce expects an improvement in travel conditions in the second half of 2021 as the vaccination programmes support the economic recovery.
The shares have recovered somewhat but are nowhere near pre-pandemic levels. The company has a strong brand and has taken the right steps to weather the crisis. I think now could be the time to be adding the stock to my diversified portfolio.
