The Rolls-Royce (LSE: RR) share price has been on one major journey in the last five years. Half a decade ago, a share in the British manufacturer would have cost me around 270p. Yet if I’d bought in late 2020, I would have paid less than 40p.
Since its 2020 lows, it’s staged a staggering recovery. In the last 12 months, the stock has shot up an incredible 216%. If I’d invested £5,000 a year ago, today I’d be sitting on £15,800.
That’s impressive. And it has me wondering whether this surge will continue.
Too good to be true?
Well, it may do. But what concerns me is that its share price may have topped out. And while I don’t want to miss out on some handsome gains, I’m wary of buying into the hype. The stock has gone on a tear. But as they say, all good things must come to an end. I’m cautious that its bubble may burst.
What doesn’t help is that the aviation industry is volatile. It’s been through a lot in the last few years with the pandemic. And the ongoing conflicts in the Middle East and Ukraine are a lingering threat. Any further travel restrictions could hinder Rolls-Royce’s operations.
It’s also sitting on a lot of debt. Granted, at nearly £3bn, this isn’t the largest pile out there. However, higher interest rates won’t aid it in paying this down. Additionally, around three-quarters of it is due to mature between 2025 and 2027.
Not all bad news
Yet despite my concerns, there’s plenty to like about Rolls-Royce.
First of all, I like the moves CEO Tufan Erginbilgic has made since taking over back in January. For example, the business plans to cut up to a further 2,500 roles in addition to the 10,000 it made in 2020. This should help the business streamline as it works to become “more efficient and effective.”
Erginbilgic has also announced his aim to quadruple profits to £2.5bn by 2027. Alongside this, the firm also plans to raise £1.5bn through exiting non-core businesses, such as its electrical operation.
As an investor who’s always seeking income, news of a potential dividend is also something I’m happy to see. The firm cut its dividend in 2019 due to large financial pressures. But with its recovery, analysts are expecting to see it recommence within the next year or two.
Missing out?
So, am I missing out? Or at its current price is the stock a trap? It’s tough to say. But I won’t be buying it. For now, at least.
The recovery it’s made is impressive and the business is heading in the right direction. However, I’m wary that today’s share price is a reflection of investors getting carried away.
I’m in it for the long haul, not quick gains. If its price is pulled back, I’ll think again. Until then, I’ll be waiting on the sidelines.
