Rolls-Royce Holdings (LSE:RR.) shares soared 16% on Thursday (27 February) after the group released its 2024 results. Investors seemed impressed that underlying revenue was £507m (2.9%) higher than the consensus forecast of analysts and, more importantly, pre-tax earnings were £242m (11.8%) better. Earnings per share beat the analysts’ expectations by 9.1%.
However, I suspect most of the impressive rise in the share price resulted from the directors announcing an upgrade in their mid-term targets.
Dividends to resume
Significantly, after an absence of over five years, they also reinstated the dividend. Subject to shareholder approval, those on the register on 22 April will receive 6p a share on 16 June. Again, this beats the forecasts. Analysts were expecting a payout of 5.2p for 2024.
Rolls-Royce last paid a dividend in January 2020. It’s well documented that the pandemic nearly wiped out the company, and it’s taken a few years for the group’s balance sheet to be sufficiently robust for it to be in a position to resume payouts once more.
In another move designed to pleased shareholders, the group announced a £1bn share buyback programme for 2025. In theory, this should increase earnings per share and increase the value of the group.
But after the surge in its share price, the stock’s now yielding a rather miserable 0.8%. This is way below the FTSE 100 average of 3.6%. If the company decided to use the cash set aside for share buybacks to increase the dividend, it’d have only a marginal impact on the yield.
Based on the current number of shares in circulation, the dividend will cost £510m. The same sum in 2020 would’ve resulted in a 26p payment to shareholders. However, since then, the company’s had to issue another 6.57bn shares to survive.
I think it’s going to take a long time before Rolls-Royce is considered a dividend share once more.
A remarkable performance
However, with a 249% increase in its share price over the past five years, it’s been the best performing growth stock on the FTSE 100.
Despite persistent concerns that it’s over-valued, the company continues to upgrade its earnings forecasts which helps maintain the upwards momentum in its share price. It now trades on a historical (2024) price-to-earnings (P/E) ratio of 36.7.
This makes other stocks look cheap. For example, BAE Systems‘ P/E ratio is around 20.
US companies usually attract a higher valuation multiple than their UK counterparts. But Rolls-Royce shares are now more expensive than those of RTX Corporation, the world’s largest aerospace and defence group.
With such a strong stock performance, it’s tempting to think that the bull run will end soon. The group’s aerospace division is particularly vulnerable to a global economic slowdown. And constantly having to innovate — and come up with new products — is expensive.
But the company continues to win major contracts, including one for £9bn to power the UK’s nuclear submarine fleet. It’s also leading the way in developing small modular reactors (factory-built nuclear power stations), which many believe will help transform the energy sector.
And even before the company’s 2024 results were released, 12 out of 17 brokers rated the stock a Buy.
For these reasons, Rolls-Royce could be a stock for growth investors to consider but, in my opinion, income investors should think about looking elsewhere.
