The Rolls-Royce share price rise could have made me this much in just a year

The Rolls-Royce share price gain of the past year made some nice cash for smart investors. But the big question is… what happens next?

| More on:

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.

A year is a short time on the stock market, as any look at the Rolls-Royce Holdings (LSE: RR.) share price shows.

The company has been a real star of the recovery since the Covid pandemic. And in the past 12 months, the price has climbed by 170%.

FTSE 100 growth star

That’s enough to turn £10,000 into £27,000. Growth stocks like that don’t come along too often. And it rarely happens with a FTSE 100 stock.

These blue-chip firms are supposed to be mature and dull, aren’t they? They’ve mostly settled down to modest growth, and steady dividends year after year.

Well, obviously, a crisis like the 2020 stock market crash can turn that upside down. All bets are off, and we can find big winners and losers just about anywhere.

Key lesson

I take a lesson from what’s happened to Rolls-Royce. Part of it is that we should never panic just because a stock falls.

Whatever’s going on, selling just because that’s what everyone else is doing has to be a poor move. And the same goes for buying just because everyone else is piling in.

No, even in crisis times, we need to keep cool heads and stick with a careful look at a stock’s fundamentals.

That means I try to buy or sell based only on how I see a stock’s long-term prospects.

Hard to do

Now, that’s easy to say. But I do find it hard to keep my mind clear of the bust and boom of the past few years.

Still, I try to do one thing, and ask myself one question. What if Covid had never happened, if the Rolls-Royce share price didn’t crash, and didn’t need to climb back the way it has.

What if it just went in a straight line from February 2020 to now? And if broker forecasts were still exactly as they are today.

Valuation

We’d be looking at a 29% share price rise over five years, which is still fair.

But going back over 10-years, there’s a gain of only 7%. The FTSE 100 managed 17.5% in that time, which itself is pretty poor.

That soaring 12-month winner doesn’t look so great now. It looks more like a 10-year loser.

If I’d put that £10,000 in Rolls-Royce shares a decade ago, it would be worth just £10,700 today. Well, plus dividends. But they were weak even before Covid brought them to a halt.

What now?

What might £10,000 in Rolls-Royce turn into in the next 10 years? We can only look forward. And forecasts show strong earnings growth for the next three years.

The forecast price-to-earnings (P/E) ratio for 2024 is up at 28, more than twice the FTSE 100 right now. It could drop below 20 by 2026, though. And net debt is down to only £2bn now.

What about the next 12 months for the Rolls-Royce share price? It might be good. But I don’t expect another 170%.

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 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

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

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

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »