The Rolls-Royce (LSE:RR) share price has been falling steadily for some time now. After signs of recovery in 2021, shares of the engineering firm are down 46% in the last six months and 27% in the last year. Despite a return to profits and a huge internal restructuring, investors are steering clear of the aviation company. It is now trading as a penny stock at 80p, far from its pre-pandemic highs.
Here are some reasons why I think the Rolls-Royce share price is falling. They also explain why I’m looking at other exciting UK shares for my long-term portfolio.
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After a tumultuous 2020, the airline market is opening up slowly. Although air travel is yet to hit pre-pandemic levels, there was a jump in 2021 and early 2022. Many investors, including myself, expected the Rolls-Royce share price to benefit from this.
However, the recovery was marred by multiple small outbreaks across the world. Air traffic in 2021 was still 49% below 2019 figures. Most international flights flew at less than 50% capacity and the average flight volume in 2021 was 68%. Analysts estimate total losses incurred by the industry during 2020 and 2021 at nearly $700bn. And Rolls-Royce recognised the sluggish recovery and shifted focus to its ‘new markets’ division.
These new segments, including power systems and eco-friendly engines, are very promising but young. And how long will Rolls-Royce take to reach profitability in these spaces?
The board is already reinvesting a sizable chunk of its revenue into new markets. In 2021, the company recorded an underlying revenue of £10.95bn with an operating profit of £414m. R&D expenditure was £1.18bn, which looks steep considering the low profit margins. I wrote about the uphill battle Rolls-Royce will face in meeting its ESG goals in April, and the situation hasn’t changed.
Also, another major concern for me is the sizeable net debt of £5.15bn in 2021, up 44% from 2020. While the company could turn a steady cash flow from its £50bn order book, I think this debt will leave glaring holes in upcoming results.
Despite the company’s stellar reputation and effective cost-cutting methods during the pandemic, I think its recovery will be very sluggish.
Global stock indexes are very volatile right now. Even if upcoming results are favourable, the Rolls-Royce share price could fall significantly every time there is a small market crash.
And I think there are much better UK shares for my portfolio that offer growth potential and passive income. Although Rolls-Royce’s new power systems wing is promising, I like Volex shares better. The cable manufacturer works closely with the electronic vehicle industry, which is booming. Although its share price has taken a tumble this year, recent financials look good. The company finished well ahead of analyst estimates and is growing revenue by nearly 30% year on year.
I also like the Aviva share price right now for its forward dividend forecast of 7.3% yield and steady growth since the pandemic crash. Although dividend payouts have been rocky since the pandemic, the company has pledged £4.75bn through share buybacks and dividends over the coming months. And I think it is a good, stable passive income play for me at the moment.