Since I bought shares in Rolls-Royce Holdings (LSE:RR.) they’ve nearly doubled in value. And those who bought a couple of years earlier than I did have enjoyed even bigger gains. But it’s human nature to think that the strong rally’s going to end soon.
However, the FTSE 100 aerospace, power systems, and defence group continues to prove the doubters wrong. Therefore, has the time come for me to buy more Rolls-Royce shares? Let’s see.
To buy or not to buy?
One company that’s buying the group’s shares is Rolls-Royce itself. On 26 February, it announced the start of a £2.3bn share buyback programme, to supplement the £200m bought since the start of the year. This is equivalent to approximately 2.1% of the group’s current (16 March) stock market valuation.
But share buybacks can be controversial.
I buy shares to build wealth. When a company buys its own shares, it doesn’t change its operational performance. In fact, it reduces its overall value by diminishing its bank balance. Indeed, critics argue that it’s a poor use of surplus cash.
However, I suspect most management teams disagree. Reducing a company’s share count will increase earnings per share (EPS), all other things being equal. Many executive pay packages include boosting EPS as one of the key metrics.
Warren Buffett’s also a fan. But only, he says, if “repurchases are made a value-accretive prices”. He adds: “when a company overpays… the continuing shareholders lose”. So is Rolls-Royce paying too much for its own stock?
Well, with a historic price-to-earnings ratio of around 43, the group’s shares aren’t cheap. The £2.3bn set aside for the remainder of 2026 will buy approximately 182m of them at the current price. Three years ago, it would have bought over 1.3bn more.
However, the group has repeatedly upgraded its forecasts in recent years. In these circumstances, a high earnings multiple can be justified. The continued growth in both profit and cash is giving momentum to its share price.
| Date/2028 targets | Underlying operating profit (£bn) | Free cash flow (£bn) | Underlying operating margin (%) |
|---|---|---|---|
| 31.7.25 | 3.6-3.9 | 4.2-4.5 | 15-17 |
| 26.2.26 | 4.9-5.2 | 5.0-5.3 | 18-20 |
But any sign that these targets aren’t going to be met and there could be a significant loss of investor confidence and a rapid share price correction.
Another risk is a prolonged war in the Middle East. The grounding of flights and rising jet fuel costs could affect the number of hours that its engines are used by airlines.
Fingers in other pies
But data centre growth is helping the group’s power systems division.
And as unpalatable as it might be, global instability is likely to boost its defence business. The group claims to be the “incumbent supplier on the main European NATO platforms” and says it’s “well positioned” to support President Trump’s plans to spend more on the US military. Before the current conflict started, the order backlog for this part of the group was £17.4bn. This is equivalent to three years of revenue.
Overall, I think the stock’s still worth considering despite its recent strong rally. Even so, I don’t want to buy any more shares in the group. Why? Well, I believe that it’s important to have a diversified portfolio. Savvy investors know not to have too many eggs in one basket. However, I believe the group’s shares still have further to climb over the long term.
