For a company that specialises in speed, shares in Rolls-Royce (LSE: RR) have not been going anywhere fast. Over the past year, Rolls-Royce shares have drifted 12% lower. That is not disastrous news, but as a shareholder I would obviously prefer to see my holding increase in value.
Here are three things I think could help the shares start to show positive momentum again.
1. Strong defence spending
The company’s results in the past few years have been dominated by performance in its civil aviation division. That is understandable, as a fall in the need for engine servicing due to lower passenger numbers spelled bad news for the engineer’s revenues and profits.
But I think it is important to remember that defence clients form a large part of the Rolls-Royce customer base. Unlike many airlines, such clients do not have shareholders to keep happy. They can spend even in a recession. With security tensions mounting across the globe, I think strong performance in the defence division could provide support to Rolls-Royce shares.
The company said that last year its defence division saw “growth driven by strong demand in all our markets”. In setting out its expected performance for this year, the company specifically mentioned “continued good contribution from Defence”.
2. Lifting of travel restrictions
Civil aviation has recovered strongly in North America and Europe, thanks to the lifting of many travel restrictions. But key global economies such as Japan and China continue to impose a variety of travel restrictions.
Nobody knows when that will end. But it seems fair to expect that such restrictions will be eased at some point. When that happens, I expect passenger volumes to increase and airlines to restore more of their long-haul service. That could be good for engine servicing revenues in Rolls-Royce’s civil aviation division. It could also spur more airlines to start updating their fleets, boosting the engine maker’s order book. So I think the easing of such restrictions could trigger a positive rerating for Rolls-Royce shares.
3. Dividend restoration
Many shareholders have longstanding investments in Rolls-Royce. One reason for that was its dividend.
For now the payout remains suspended. The company will not pay dividends this year even it can afford to, due to loan conditions. But, depending on its performance, it may be free to restart payouts next year.
It has already made financial progress, such as returning to free cash flow generation. If it signals that it expects to be able to restart dividends, I think that could give a boost to Rolls-Royce shares.
My move on Rolls-Royce shares
Although I see reasons to be cheerful about the outlook for Rolls-Royce shares, there are ongoing risks. Indeed, the share price fall over the past year suggests that many investors remain sceptical of the investment case.
Civil aviation is returning closer to pre-pandemic levels, but rising fuel costs could put a dampener on that. Growing pressure around the use of fossil fuels means the business is developing engines that run on alternative energy sources. That could add costs that hurt profits for many years, before any product is ready even for a test market.
However, I continue to see value in Rolls-Royce shares. I hold some in my portfolio and would consider adding more at the current price.
