Shares in Rolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US) hit a sudden slump last month, dropping 13.6% on the day full-year results were released, to 1,045p — the price has since recovered to 1,092p, but it’s still down a couple of percent over the past 12 months compared to a 3% rise for the FSTE 100.
At around 2%, Rolls-Royce’s dividends are nothing to shout about either, so what was the fall all about and why do I rate the company a solid ISA buy?
Brief hiccup
Well, although the aerospace and defence firm’s chief executive John Rishton said “2013 was a year of good progress, in which our order book, underlying revenue and underlying profit all grew” the share price shock stemmed from his telling us that “In 2014, we expect a pause in our revenue and profit growth, reflecting offsetting trends across the business“.
It’s largely due to cutbacks in defence spending, particularly in the US, and Mr Rishton did go on to say he expects growth to resume in 2015 — but you know what short-termers the institutional investors are.
When it comes to deciding how to use our annual ISA allowance (which will be raised to £15,000 come July), the focus should really be on the long term — ideally a couple of decades or more.
How has Rolls-Royce done so far?
If we look to the longer term, the Rolls-Royce share price performance has been nothing short of shining.
Over the past five years, the shares have soared by around 270% compared to less than 70% for the FTSE 100 — and over 10 years we see a 400% gain against the FTSE’s 50%. That 10-year performance equates to an annual rise of 8.4%!
The shares are on a price-to-earnings (P/E) ratio of 15 based on 2015 forecasts, which is a little above the FTSE’s long-term average of 14 and below the index’s current 18 — so they’re by no means overvalued for a stock with growth potential.
Future potential
Over the next 20 years, it would be foolhardy to rely on 8.4% per year, but suppose we see a 5% annual rise? That doesn’t sound too unrealistic, and once we add that 2% dividend yield (and reinvest it each year), it could turn every £1,000 invested in Rolls-Royce today into £3,900 in 20 years time.
And with the added safety of being in a business that’s not going away any time soon, I reckon that makes Rolls-Royce a serious candidate.
