An end to Covid restrictions was good news for British engine maker Rolls-Royce (LSE: RR) and its shares. After shooting upwards this year, here’s how I think its share price could climb back above highs of over £4.
The price
Let’s start with that recent leap in the price. After sitting at a two-year low of 70p in September, the shares have been surging and are now at £1.50. Rolls-Royce is actually the FTSE 100’s biggest riser this year, while still some way off its 2014 high of £4.36.
This impressive leap was driven by a superb post-pandemic recovery. As Covid grounded planes, the firm suffered. But as flights have got back to normal, its Civil Aerospace segment went from a £1.7bn underlying loss to a £226m profit. Its other segments Defence and Power Systems increased revenue too. It seems CEO Tufan Erginbilgic, who took over in 2020, could be managing the firm back to success and, potentially, a return to dividends.
Dividends
That said, as nice as that upswing in its results is, Rolls-Royce is still bleeding money. The company posted a net loss of £1.2bn in 2022 and still has a sizeable £3.2bn debt pile. That means no dividends for now, continuing its strategy since the pandemic began. With limited growth prospects, a £4 share price seems a long way off without any kind of dividend payment.
So, when could a dividend be back? Well, 2022 still saw reduced flying hours due to Covid, but 2023 should be close to, if not surpassing, pre-pandemic flight numbers. The firm expects an increase to £0.6bn-£0.8bn of free cash flow for the year ahead, but that’s not substantially more than the £505m this year. I’m not holding my breath here, and it seems the best value for Rolls-Royce shares may come further down the line.
Catalysts
While dividends aren’t on the horizon, what future catalysts might spark the shares into life? Orders for all three Rolls-Royce divisions are growing. But an average 14% increase in revenue is hardly enough to see the 250%+ growth to a £4 share price.
Yet one development does stand out to me, and that’s the project with the UK government for small modular reactors (SMR). These SMRs are mini nuclear power stations that can provide energy to around 1m households. The first one could be built in the UK and could be operational by 2029. That’s some way off, but it could be the start of nuclear power reducing our reliance on fossil fuels. With the firm’s expertise in such power going back to the 1950s, I think this has huge long-term potential for the share price.
Am I buying?
All in all, the momentum here tells me that Rolls-Royce will head back to a £4 share price at some point. My caveat is that it might not be soon. So, I’ll be looking at other cheap UK shares rather than picking up more.
