If I invested £1,000 in Rolls-Royce shares this week, what could I earn this year?

Christopher Ruane weighs some possible scenarios for Rolls-Royce shares between now and the end of the year — then considers his response.

| More on:

Image source: Rolls-Royce plc

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.

If I had invested £1,000 in Rolls-Royce (LSE: RR), a year ago, my stake would now be worth around £2,873! That is quite a return. But even buying Rolls-Royce shares at the start of 2024, I would have seen the value of my holding increase by 40% already, in a matter of months.

Clearly, there has been huge momentum in the engine maker’s shares lately.

But could things move even higher from here?

Imagine I invested £1,000 this week. Here is what might happen.

Sideways share price move potential

Past performance is not necessarily a guide to what will happen next. So, although Rolls-Royce shares have soared in altitude, they could now enter a holding pattern. I might end the year with a holding worth more or less what I paid for it.

At the moment, the dividend is suspended and I do not expect it to come back this year, although management has said it plans to bring back the shareholder payout once finances are strong enough.

Ongoing upwards momentum – or sudden drop?

So far, the rise in Rolls-Royce shares may look like it has defied gravity.

But that partly reflects a low base.

After all, in 2020 the price collapsed as customer demand in the core civil aviation business plummeted in a matter of weeks.

Despite the rise, the shares trade on a price-to-earnings ratio of 15. That does not strike me as unduly expensive given the firm’s unique technology, large installed customer base and strong order book.

Given an aggressive medium-term plan to improve financial performance, the prospective valuation arguably looks cheap. On that basis, I think buying £1,000 of Rolls-Royce shares now could see me ending the year sitting on a paper gain — perhaps a sizeable one.

What if the company does not demonstrate the right progress in meeting those goals, however? After all, it has a long history of mixed business performance even when sales were strong.

Additionally, an unforeseen event that suddenly and dramatically affects sales – as travel restrictions during the pandemic did – could throttle profitability.

That might send Rolls-Royce shares into a tailspin by the end of the year, leaving me sitting on a significant paper loss.

Another risk I see is that, even if the business performs satisfactorily, some investors will try to lock in their recent strong paper gains by selling Rolls-Royce shares. That could depress the price.

Not checking in for the journey

As a long-term investor, though, my horizon lies beyond the next few months.

Momentum can influence a share price, but over the long run, I expect business fundamentals to shine through.

On that basis, I think there could still be potential value in adding Rolls-Royce shares to my portfolio now.

But the risks do not sit well with me. I am particularly concerned that the current share price offers me little margin of safety if sales suddenly get blown off-course due to an event outside the company’s control, like a pandemic or terrorist scare leading to airlines grounding their fleets.

So, I have no plans to invest.

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.

C Ruane 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 »