A couple of years ago, travel demand was rising again. But airlines and tour operators remained battered by a very challenging period during the pandemic. Rolls-Royce (LSE: RR) also suffered badly, as its airline customers put the brakes on a lot of spending.
If I had bought Rolls-Royce shares then, what would my position be now?
Strong return
Over the past two years, the shares have increased in value by around 67%. That means if I had invested £1,000 in them two years ago, I would now have a holding worth around £1,670.
In other words, my investment would have done handsomely!
Reasons for price move
As an investor, a strong positive return on an investment is always welcome. But what also matters is the reason for such a return. Is it simply a stroke of good luck, or market exuberance about a particular stock? Or have there been developments in the business that help explain the price gain?
When it comes to Rolls-Royce shares, I think a lot of the upwards movement can be pinned on a sharply improving business performance. The company has been disciplined about costs, is cutting debt, and is in growth mode again.
In the first half of this year, for example, on a statutory basis revenues grew 34% year-on-year, operating profit more than tripled and the company reported a £1.4bn profit.
With a strong tailwind, Rolls-Royce looks set to further improve profitability.
It should benefit from its trusted brand in an industry dominated by a few big names that is set to keep enjoying rising demand for commercial air travel. Improving defence spending also looks set to fuel ongoing revenue growth at the aeronautical engineer.
Zero dividends
Rolls-Royce shares used to be a popular choice among income investors. But the engineer cancelled its dividend during the pandemic and has not yet brought it back. So I would have received no payouts from the company over the past two years.
In its interim results last month, the company did not declare an interim dividend and laid out no specific plans to restore one in future.
If business continues to be strong however, I think the shareholder payout could come back at some point in the coming years.
Looking forward
Playing ‘what if’ can be insightful as an investor. But I did not invest in Rolls-Royce shares two years ago and hold them until today (though in fact I did own them for part of that period). The question I need to ask now is whether I might want to buy the shares looking at the prospects for the years ahead.
Improving earnings mean Rolls-Royce shares trade on a price-to-earnings ratio of 13, which looks attractive to me.
But a sudden slump in travel demand can significantly hurt demand overnight, something which the company has no control over. That risk alone is enough to put me off buying the shares again.
