Rolls-Royce (LSE:RR.) shares have started this new year as they left off in 2025. Rising 5% since 1 January, the FTSE 100 stock’s now up a whopping 105% since this time last January.
Rolls’ share price has surged for several reasons. Profits and cash flows have rocketed, thanks to strong end markets and the fruits of extensive restructuring. It’s also delivered share buybacks and increased dividends following successful balance sheet repairs.
The question is, can the FTSE company’s share price continue to rise?
Growth and dividends
A look at Rolls-Royce’s earnings and dividend forecasts could provide some valuable insights on this.
City brokers believe the engineer’s earnings will rise 14% in 2026. That’s down from the 42% expected for last year — annual results are due on 26 February — but Rolls still offers attractive growth potential. Another 14% bottom-line rise is tipped for 2027 too.
Strong growth forecasts fuel expectations of a increasing dividend as well. A predicted payout of 9.1p per share for 2025 is expected to rise to 11.2p in 2026, and to 12.7p in 2027.
There’s a great chance Rolls shares will pay the dividends analysts are expecting, in my view. Predicted cash rewards are protected three times over by anticipated earnings through to the end of next year. And the company has a strong balance sheet to support future dividends. It had net cash of around £1.1bn as of last June.
However, are its earnings forecasts for the period as rock-solid? I’m not convinced. The truth is, I think those estimates leave Rolls’ share price in peril of a possible collapse.
What might go wrong?
The problem is that the shares are now enormously expensive. They trade on a forward price-to-earnings (P/E) ratio of 38.2 times, significantly above the long-term average of 15.
They also offer little value from a dividend perspective, with a yield of just 0.9%.
So why is this a problem? A valuation like this leaves little wiggle room if sentiment around the company weakens. Rolls has an excellent recent history of delivering blowout results, but if it loses momentum even slightly, the market could start to question its premium rating and send its share price tumbling.
And today there are big risks that may make this reality. Supply chain problems remain severe, and while the firm’s managed to navigate these problems skilfully, any setbacks could have significant implications for costs and its ability to meet orders.
A sharp slowdown in the critical airline industry’s another potential threat in the near term, given economic uncertainty and continued pressure on consumer spending. Rolls makes more than two-thirds of profits from tasks like servicing plane engines, so a downturn could be catastrophic.
And while the company is a market leader, competition is fierce and lost or missed contracts are another substantial danger that can rock investor confidence.
Is Rolls-Royce a Buy?
At current prices, Rolls-Royce shares carry far too much danger for my liking. So I won’t be buying the FTSE 100 engineer for my portfolio. But I could be wrong and for more risk-tolerant investors, I think its strong growth record may make it worth researching further.
