If I’d invested £5,000 in Rolls-Royce shares 5 years ago, here’s how much I’d have now!

Our writer looks at the performance of Rolls-Royce shares over the past five years and asks whether now is the time to include the stock in his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Jumbo jet preparing to take off on a runway at sunset

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It has been a disappointing few years for those that own Rolls-Royce (LSE:RR.) shares.

Over the past five years, the share price has fallen by 65%. Since its peak in December 2013, the stock is down 76%.

Ignoring broker’s fees and stamp duty, £5,000 invested in January 2018 would now be worth £1,750.

Flying high?

The core business of Rolls-Royce has suffered enormously from the pandemic.

The majority of its revenue is still generated by its Civil Aerospace division. But, this has fallen dramatically since Covid-19 decimated the aviation industry. The company generates income based on the number of hours flown by the aircraft that use its engines.

YearLarge engine flying hours (LEFH)
201814.3
201915.3
20206.6
20217.4

There has been some recovery in 2022. In the four months to the end of October, LEFH were 65% of 2019 hours. But, the World Economic Forum does not anticipate air travel returning to pre-pandemic levels until 2024.

A further concern is the fall in the number of widebody engine deliveries.

YearEngine sales
2018469
2019510
2020264
2021195

With the expected life of a well-maintained engine being 15,000 hours, a reduction in new engine sales will adversely affect revenue for years to come.

Encouragingly, Boeing‘s 787 Dreamliner has now received clearance to fly once more. Rolls-Royce will be required to deliver further engines once aircraft production is resumed.

Also, in November, it was announced that the company’s Defence division has renewed two five-year contracts worth £1.8bn.

Debt levels

The deterioration in the financial performance of the business, which saw cash fall by £6.6bn in 2020 and 2021, led the directors to embark on a debt-reduction strategy.

The company recently sold its ITP Aero business for £1.6bn, the proceeds from which were used to repay its £2bn UK Export Finance loan.

Its debt profile now requires £500m to be repaid in 2024, £700m in 2025, and £2.8bn between 2026 and 2028.

This should give the company sufficient breathing space to restore some of its liquidity, and possibly refinance its longer-dated debt.

A £1.3bn cost-reduction programme has also been concluded.

Furthermore, the company is able to mitigate the impact of rising costs through having inflation-linked pricing on many of its long-term contracts.

Going nuclear

In an attempt to diversify away from its core business, the company has recently started to explore the feasibility of manufacturing small nuclear reactors.

These have the advantage of being built far more quickly than conventional power stations. The intention is to make these modules in a factory, before assembling them on-site in 500 days.

But, the first reactor is not expected to generate power until 2030.

Too much turbulence for me

Although I’m confident that Rolls-Royce is on the path to recovery — free cash flow is expected to be positive in 2023, and the company is profitable once more — I don’t want to invest at the moment.

The company has a great reputation for high-quality engineering, but demand for its products is largely outside of its control. I also wonder whether increased working from home means business travel will ever recover.

Also, the absence of a dividend (it was suspended in 2020) leads me to conclude that there are currently other more attractive opportunities in the FTSE 100.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »