To investors who hold Rolls-Royce (LSE: RR) shares, I salute you. Especially anybody who bought them back on 30 September 2022, when the stock briefly dipped below 70p. If brave souls had parted with £10,000 back then, they’d be sitting on a small fortune today.
The Rolls-Royce share price has since surged an astonishing 1,850% to 1,366p. That would have turned £10k into an eye-popping £195,000. Sadly, it’s unlikely many investors got that lucky. But a lot will be sitting on outsized gains. Most will be asking themselves this question: can the Rolls-Royce share price keep climbing?
As someone who holds the stock, I’m asking that myself. But there’s another equally important question that investors may not consider addressing. I’ll come to that in a moment.
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First, let’s start with the question everyone is asking. Can Rolls-Royce CEO ‘Turbo’ Tufan Erginbilgic keep setting ambitious targets and beating them?
Last July, Rolls upgraded its full-year 2025 targets to underlying operating profit of £3.1bn–£3.2bn and free cash flow of £3bn–£3.1bn. On Thursday (26 February), it breezed through both. Full-year profits climbed another 28.8% to £3.46bn, while free cash flow hit £3.3bn.
Erginbilgic is setting the bar even higher for 2026. He’s guiding for £4bn–£4.2bn of underlying operating profit and £3.6bn–£3.8bn of free cash flow. Mid-term targets to 2028 are more ambitious still, with profit of £4.9bn–£5.2bn and cash flow of £5bn–£5.3bn.
If Rolls-Royce beats these too, the shares will almost certainly power on. If it falls short, punishment will be swift. The price-to-earnings ratio is a lofty 65. Expectations are high.
It’s a tall order and plenty could go wrong. The rollout of its ‘mini-nuke’ small modular reactors could stall. Technical and supply chain issues are a constant risk. And if the supposed AI bubble bursts, demand for data centres could slow, hitting its Power Systems division.
Don’t forget to diversify
Rolls-Royce has the wind in its sales and I think its shares are still worth considering with a long-term view. But like I said, that’s the question everybody is asking. Investors sitting on big gains should ask themselves a second question. Are they over-exposed if Rolls-Royce fails?
Rolls-Royce may be groundbreaking, but the old rules still apply: don’t put all your eggs in one basket. As a rule, most financial planners would say nobody should hold more than 5% or 10% of their portfolio in one stock.
Personally I’m at 4.5% with Rolls. I’m comfortable with that, but probably won’t buy any more shares. Anybody who’s above 10% might want to have a serious think. Because when a share this hot finally disappoints — and at some point it will — the sell-off could be savage. I don’t want to wake up and find my pension plans have taken an outsized one-day knock.
It’s almost impossible to answer the first question. But there’s a relatively simple answer to the second. If somebody decides they are over-exposed, take a little profit. Diversify. There are plenty of other great dividend and growth stocks on the FTSE 100 worth considering today. Who knows, one or two might even do a Rolls-Royce.
