Here’s why the Rolls-Royce share price scares me

The Rolls-Royce share price has been one of the big FTSE 100 success stories of the past year. But here’s why I won’t risk any of my money.

| 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.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The Rolls-Royce Holdings (LSE: RR.) share price looks scary to me. Billionaire investor Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“.

Is Rolls-Royce a wonderful company? It’s a global leader in its industry. And the management has just pulled off one of the most impressive recoveries I think I’ve ever seen.

I think it’s about as close to wonderful as a FTSE 100 stock can really get.

Fair price?

But is the share price a fair one? It actually might be, even though we’re looking at a price-to-earnings (P/E) ratio of around 33 now.

For a company priced to go bust just a couple of years ago, that’s quite remarkable.

Based on forecasts, the P/E could drop to 22 by 2025. And if Rolls achieves the growth it hopes for, that could indeed turn out to be a fair price.

But there are two main reasons I’m steering clear, and one is the market itself. What do I mean? Take a look at the Rolls-Royce share price chart:


It looks to me like Rolls-Royce shares have been in the firm grip of market sentiment for much of the past five years. That’s fine when it’s all doom and gloom, as it can push shares down too far and give us some bargain buys.

But when the mood’s bullish, like right now? It can lead people to think only about the upbeat possibilities, and fail to account for the risk.

If all goes well, I think Rolls shares could do well from here. But any failure to match up with hopes, even by a whisker, and I think there’s a big risk the shares could fall. The safety margin I like to see just isn’t there.


To get to my second big reason to avoid Rolls-Royce shares, I need to come back to what Warren Buffett said again.

And I have to ask, isn’t it surely best all round to buy wonderful companies at wonderful prices? That might not happen very often, but I think I’m seeing it right now.

I also see some among the FTSE 100‘s big banks at the moment. Look at Barclays, Lloyds Banking Group and NatWest Group.

Big dividends

They’re on dividend yields of 4.9%, 5.8% and 7.4% respectively. What about their P/E mutliples? They’re between 5.4 for Barclays, and 6.2 at NatWest.

Thats a far cry from 30+ for Rolls-Royce. Safety margin? These bank valuations look like nothing but safety.

A further dip into recession, the effects of inflation and interest rates, and growing bad debt provisions could hurt the banks. But I see far lower risk at these valuations than with the lofty share price at Rolls.

I’ve picked just the banks as examples. But I see lots of FTSE 100 companies I rate as wonderful, at wonderful share prices. I just see no need to take on the Rolls-Royce risk in a value buyer’s market.

Now, if Rolls-Royce shares should fall…

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, Lloyds Banking Group Plc, and Rolls-Royce Plc. 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

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This forgotten FTSE 100 gem could be the best bargain on the stock market

The FTSE 100 is full to the brim of high-quality businesses. But this Fool has his eye on this 'forgotten'…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s a FTSE 250 stock I’d put 100% of my money into

If this Fool could buy just one stock from the FTSE 250, Games Workshop would be his choice. Here, he…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

2 reasons Warren Buffett might love this stock, and 1 reason he might avoid it like the plague

Warren Buffett's one of the best stock pickers of all time. But would he approve of Barclays shares? This Fool…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Down 28% in a week! What’s going on with the share price of this FTSE 250 British icon?

There’s one stock in the FTSE 250 that took a bit of a battering last week. But I’m not surprised,…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

At around £28.50, Shell’s share price looks cheap to me

Shell’s share price still looks undervalued against its fossil-fuel-focused rivals to me, despite it pushing back its carbon reduction targets.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

433 shares in this FTSE 100 dividend superstar could make me £18,803 in annual passive income!

This overlooked FTSE 100 gem has one of the best yields in the index, looks undervalued, and makes me big…

Read more »

Investing Articles

2 under-the-radar investment trusts I’d buy for a new Stocks and Shares ISA

Here are two fantastic trusts that I'd happily snap up today if I were building a Stocks and Shares ISA…

Read more »