The Rolls-Royce share price has been soaring and it’s easy to see why investors are excited. As I write on 20 August, the shares are trading at £10.45 — up 77% year to date and 112% in the past 12 months.
With shares in the defense, aerospace, and power solutions giant trading strongly, I thought I’d dive in and see if it’s still a stock for value investors to consider in 2025.
What’s happening to the Rolls-Royce share price?
There’s no doubt the company is a heavy hitter in the FTSE 100 Index. As I write, it boasts a market cap of around £88bn which has swelled this year as investors have piled in.
The company’s stock price has been boosted by consistently strong profit and cash flow delivery.
In its half-year update on 31 July, management upped guidance for both underlying operating profit and free cash flow to £3.1bn-£3.2bn and £3bn-£3.1bn, respectively. Not bad for a company that has had its fair share of financial turbulence over its long operating history.
Its been good news for shareholders that are eager to see some cash returns as well. Management has restarted dividend payments, including a 6p final dividend paid in June. Then there’s the share buyback programme of up to £1bn, with £0.4bn completed by the end of June.
Valuation
While Rolls-Royce is a great business with a rich history, I think entry point matters when investing for the long term.
The company has a price-to-earnings (P/E) ratio of around 42 times right now and a dividend yield of 0.7%. That looks expensive to me even for a great business such as Rolls.
It is worth considering that the company is forecasting fairly significant growth in earnings and cash flow in the years ahead. For instance, Rolls expects to generate £4.2bn-£45bn of annual free cash flow by 2028. That could potentially lead to some serious returns to shareholders.
That wouldn’t directly impact the P/E ratio but the company’s earnings would need to also rise significantly if it is to hit that target.
Having said that, I am wary of leaning too heavily on forecasts. The world is a funny place and we’ve seen how many once-in-a-lifetime events can occur in the course of a decade.
My verdict
I do not own Rolls-Royce shares, and I won’t be buying at the current valuation. On the plus side, the company’s strategy is clearly working. This is underscored by the upgraded guidance and improving cash generation.
I just think the stock is a bit rich for value investors like myself to consider right now, particularly given the company’s fairly volatile financial history. While I’m happy to be proven wrong, I think I’ll be keeping my money on the sidelines for now.
