Rolls-Royce (LSE: RR) shares have turned a speculative pandemic-era punt into one of the FTSE 100’s most eye-watering comeback stories.
Five years ago, investors confidence was lacking in the stock. The outlook for aerospace seemed murky at best. So, what changed and how much would a £10,000 bet back then be worth today?
From pandemic pain to a monster rally
On 26 February 2021, the company’s shares closed the day at 110p a piece. As I write just before the market opened on Monday (2 March), the share price is sitting at 1,365p. That’s a total gain of 1,240% in the space of just five years.
Put another way, the stock has increased at an annual compound annual growth rate (CAGR) of 65.5%. Not bad at all.
Let’s consider an investor that put a £10,000 lump sum into the company back then. That initial investment would now be worth an eye-watering £122,955 (ignoring transaction fees and taxes).
It’s hard to overstate what that means. Incredibly, management has helped turn a company that was often seen as going nowhere into what’s now a serious market force and darling of the Footsie.
What’s driving it now?
The latest share price gains have come after Thursday’s results release for the financial year ended 31 December 2025.
Annual profits leapt 40% on the back of strong aero-engine demand and rising power needs from data centres.
What really caught my eye was the company’s strong cash flow generation. Underlying operating profits of £3.5bn were backed up by free cash flow of £3.3bn, with upgraded mid-term targets to boot.
It was also good news for shareholders in terms of returns. A final dividend of 5p takes the total for 2025 to 9.5p, representing a 0.6% dividend yield. Management also announced a £7bn-£9bn buyback programme running through to 2028.
Those are the kinds of signals that tell investors the turnaround has moved beyond promises and into repeatable cash generation.
Valuation
All of that’s great news for shareholders, especially those who bought five years ago.
However, there’s a catch. The Rolls-Royce price-to-earnings (P/E) ratio is sitting at 45.8 as I write. With little in the way of yield, that means investors are betting on growth.
I still think Rolls-Royce is well-positioned to grow into its current valuation given the clear management strategy and favourable conditions in many of its end markets.
Verdict
Yet there are big risks at the current valuation. Civil aerospace is tied to global flying hours that could turn quickly in an economic downturn. Cost pressures and supply chain disruption are never far away with the state of the economy and global geopolitics.
While there may be better value options on the market, I think the remarkable Rolls-Royce journey still makes it one to consider for investors seeking growth.
