When markets opened yesterday (7 April) after a long weekend, the Rolls-Royce (LSE: RR.) share price plummeted. Starting the week at around 1,200p, they quickly fell to a low of 1,133p in the first few hours of trading.
However, the price recovered rapidly this morning following news of a ceasefire agreement in the Middle East.
That may not seem like a huge difference in the greater scheme of things, since the shares are up 94.8% since last April. But considering the top three worst-hit shares on opening were defence-related companies, it’s worth a closer look.
A broader issue
Aside from BAE Systems, UK defence shares in general have been slipping even as the Middle East conflict drags on. In the US, defence stocks have also lagged the market, possibly due to increasing uncertainty regarding the outcome of the conflict.
With valuations already high, shaken confidence has now pushed key US aerospace and defence ETFs down between 11% to 16%. Key US constituents like Raytheon and Lockheed Martin are down 4% to 5% in the past month.
In short, the market may have grown a little too enthusiastic about higher military spending. Now that there’s talk of truces and peace deals, some of that enthusiasm is leaking out, even if the conflict remains unresolved.
No need to panic
Unlike many defence-specific stocks, Rolls-Royce doesn’t rely entirely on military spending. Its commercial jet engines and power systems have helped it become one of the UK’s biggest comeback stories.
Over the past few years, the shares have delivered over a 1,000% total return as the recovery gathered pace. Yes, they’ve fallen almost 20% from a recent all-time high — but that’s to be expected after such a parabolic rally.
After a run like that, even mildly bad news or uncertainty can trigger profit‑taking. Investors who bought earlier may simply be cashing in, especially when they see global defence stocks rolling over at the same time.
Numbers don’t lie
The recent drop doesn’t mean the business is suddenly struggling. In 2025, Rolls-Royce delivered underlying operating profit of about £3.5bn, with a healthy margin of 17.3%, and free cash flow of £3.3bn.
It finished the year with net cash of £1.9bn on the balance sheet — a big shift from the dark days of the pandemic.
Management is guiding for up to £4.2bn of underlying operating profit and £3.8bn of free cash flow in 2026, and has lifted its 2028 targets again. It also reinstated its dividend in 2025, paying a total of 9.5p per share and targeting a 30% to 40% payout of underlying profits.
Sure, the yield isn’t exactly mindblowing at 0.9%, but that’s hardly surprisingly after such huge price gains.
The fact that it’s planning to spend £7bn–£9bn in buybacks until 2028 is proof alone of its dedication to shareholders.
My verdict
In the short term, Rolls’ inflated valuation poses a risk. Future earnings now rely more than ever on healthy airline travel — an area already at risk from rising oil prices.
The conflict may have initially given the shares a boost but the longer it drags on without a permanent ceasefire, the worse things could get.
Still, for a long‑term growth investor, I still think Rolls-Royce is worth considering. It’s hardly the kind of company to collapse from a small hiccup — but there may be some volatility before things smooth out.
