Rolls-Royce (LSE: RR) shares have had a bumpy month by their standards, falling 3.3%. However, given that they’re up 1,033% over the last five years, long-term investors won’t be complaining.
Even relatively recent buyers will be content as the Rolls-Royce share price is up 83% over the last 12 months. But anybody considering buying the shares today must temper their expectations. This is now a £104bn company. Large multibagger gains are no longer the base case.
FTSE 100 growth superstar
The company’s stellar performance has been built on solid foundations. In 2025, underlying operating profit leapt from £2.5bn to £3.5bn. Margins jumped from 13.8% to 17.3%, and cash flow climbed 27% to £3.27bn. This is a clear structural improvement driven by operational discipline and tighter execution.
Rolls-Royce has also restored its net cash position, with £1.9bn on the balance sheet (up from £475m in 2024). It’s paying dividends again, even if the forward yield is a modest 0.76%. That’s forecast to rise to 0.97% this year and 1.13% in 2027.
The board is planning a £2.5bn share buyback in 2026, with more to follow. If it can steadily return more and more cash through dividends and buybacks, it’s likely to keep reeling in investors.
Aircraft engine sales and the associated maintenance contracts remain the key revenue driver. But its Power Systems division has a big opportunity in data centres and AI infrastructure. Geopolitics should continue to drive sales in its Defence division, and it has a long-term potential growth opportunity in small modular reactors (SMRs), aka ‘mini-nukes’.
As with every stock, there are reasons to be cautious. Rolls-Royce shares have a hefty price-to-earnings ratio of 43. Mind you, back in January it hit 65. Maintenance revenue is closely linked to flying hours, and further disruption to Middle East air traffic will hit earnings. If the Iran conflict leads to jet fuel shortages and flight cancellations, things could get nasty.
This stock faces challenges
There’s also a small but growing backlash against data AI centres, in the US and elsewhere. OpenAI has paused its flagship UK data centre project Stargate UK, citing high energy costs and regulatory uncertainty. If resistance grows, that could hit Rolls-Royce’s Power Systems arm. The SMR roll-out depends on government approvals, which can be frustratingly slow.
CEO Tufan Erginbilgic has driven a brilliant transformation, but maintaining momentum will require years of execution discipline. Capital-intensive projects such as SMRs and next-generation UltraFan aircraft engines will take years to come through, with execution risk along the way. If returns disappoint, capital efficiency and free cash flow conversion may suffer.
Investing is about the future. Anybody buying Rolls-Royce today must accept that the most exciting phase of the recovery is behind us. Yet it’s a real powerhouse, and is still worth considering today. Given today’s high valuation and expectations, buying on the dips appears more sensible than committing a big lump sum all at once. There could be more in the uncertain weeks ahead. As ever, hold with a long-term view.
