What the UK budget means for the Rolls-Royce share price

The UK budget contained news of higher air travel taxes and a boost to nuclear power investment. What does that mean for the Rolls-Royce share price?

| More on:
Red briefcase with the words Budget HM Treasury embossed in gold

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 (LSE:RR) share price continued to work its way higher this week. But Jeremy Hunt’s announcement looks to me like mixed news for the company.

An increase in tax on business class air travel probably isn’t helpful for the firm’s commercial aerospace division. But investment in nuclear power might be more promising.

Air passenger duty

Around 48% of Rolls-Royce’s revenue comes from commercial aviation. And the recovery of demand in this industry has been a major reason the stock has performed so well. 

Taxes on all non-economy flights, however, are set to rise. From next year, the tax on a business class flight from London to New York will increase from £581 to £647. 

There’s a risk it might dampen demand for business class seats on long-haul flights. And that would be bad for Rolls-Royce’s revenues, which come from servicing these engines based on their usage. 

The outlook for travel is strong, though, so it’s possible the tax increase won’t be large enough to make a material difference to demand. Investors will be hoping this is the case.

Nuclear power

More positive for Rolls-Royce shareholders was the news that the government is planning on investing heavily in two nuclear sites. This makes up 26% of the company’s sales.

The first is in north Wales and the second is in Gloucestershire. The hope is to increase the UK’s nuclear power capacity by developing plants at both sites.

Key to this is small modular reactor (SMR) technology. And Rolls-Royce’s CEO thinks the company has a clear lead in this area over its competitors. 

Nothing is guaranteed at this stage – there’s still competition for these contracts from five other firms. But a growing nuclear power market is a positive sign for Rolls-Royce. 

Investment thesis

Right now, both the stock and the business have momentum behind them. For investors, the real question is how far they can go. 

I’m not expecting a significant surge in demand for air travel from the current levels. But I’m expecting growth to come from elsewhere. 

Restoring strength in its balance sheet should help Rolls-Royce bring down its debt costs, which should give profits a boost. And there was positive news this week on that front.

US ratings agency Moody’s upgraded the company’s bonds to ‘Ba1’ from ‘Ba2’. That puts it one step away from an investment-grade rating, which should allow it to refinance at lower interest rates.

What next for the Rolls-Royce share price?

The budget provided a clear statement of the UK’s commitment to increasing its nuclear capacity. And that should be a very positive thing for Rolls-Royce shares. 

I see this as a potential bonus, though. In my view, there’s a justifiable case for thinking the stock is trading at an attractive valuation even without this. 

The company’s potential for increasing its earnings through balance sheet improvements is, I think, enough to justify the current share price. That’s despite a 152% increase over the last 12 months.

Rolls-Royce shares remain on my list of stocks I consider undervalued. When I’m next looking to buy shares, I’ll be giving it some careful thought.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »