Buying Rolls-Royce (LSE: RR) shares last November is the best investment decision I’ve made in some time. Almost immediately, the aircraft engine maker’s stock rocketed. Within six months, my stake was up almost 90%. If only investing could always be like that.
Rolls-Royce had a very different profile to the other shares I’ve bought in the last seven or eight months. They were all high-yielding, dirt cheap FTSE 100 income stocks. Of these, two have risen in value, asset manager M&G and housebuilder Persimmon. The other two, Lloyds Banking Group and Rio Tinto have dipped. With the exception of M&G, which is up 12.76%, all movements are in single digits.
I didn’t buy this stock for income
There’s no way I’m selling them. I bought them for income, as they offer generous yields of between 5% and 10%. Rolls-Royce doesn’t even pay a dividend today. I bought it for growth.
Having watched its share price plunge 75% over five years, I decided it couldn’t really fall that much further. At some point, the cycle would turn, and all the hard work that former CEO Warren East put in during his seven-year stint would start to pay off.
Also, I decided that markets were continuing to punish Rolls-Royce for the receding pandemic, which wasn’t its fault in the first place. When grounded fleets started flying again, and the company’s miles-based large engine maintenance contracts started ratcheting up, a recovery in revenues was inevitable.
What Covid did was reveal glaring weaknesses in the company. There were plenty of those, with the bribery scandal, and all those shock profit warnings. Yet lockdown also blinded investors to its underlying strengths.
As well as its involvement in civil aerospace, Rolls-Royce makes engines for the military transport market. In our warlike world, demand is up. It also has a potential growth opportunity, in pocket-sized nuclear plants.
There are still good reasons to hold
Now it has a tough-talking new CEO in the shape of oil industry veteran Tufan Erginbilgic, who is demanding a turn around from today’s “unsustainable” performance. His decision to dump the company’s carbon capture plan to cut costs shows he is willing to act tough too. We’ll find out whether his ‘tell-it-like-it-is’ strategy is a blessing or a curse.
Revenues have been rising, up from £11.2bn in 2021 to £13.52bn last year, with statutory operating profit jumping from £513m to £837m. The outlook is certainly brighter, but there is still a long, long way to go.
So should I hold onto my shares or bank the profit? I bought Rolls-Royce because I thought its shares had been oversold. That’s no longer the case after its recent strong run. Yet, happily, it has held steady in the recent global shares sell-off.
I wouldn’t race to buy Rolls-Royce shares today, but I’m not going to sell my stake. I’m not a trader, but an investor. My initial target holding period is 10 years, and much longer if all goes well. I’ve had a thrilling trip with Rolls-Royce so far. Now I’m buckling up for the long haul.
