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Nowadays, around the world, thousands of people are in the air thanks to the engines made by them. Rolls Royce (LSE: RR) But Rolls-Royce shares have also been up in the air over the past few years, moving in different directions.
So, if I put £300 into the company at the beginning of January, what do I have to show now?
The simple answer is that today, my Rolls Royce shares would only be worth around £173 – and I’ve never owned a share. But could a 42% fall in Rolls-Royce shares in 2022 – similar to the previous 12 months – present a buying opportunity for my portfolio? I think so and I’m buying. There are three reasons why.
1. Improving business outlook
Looking at how Rolls-Royce shares have performed so far in 2022, the business outlook may appear to be worsening.
But is that so? At the beginning of the year, tourism was recovering well and with a start. But with summer behind us, it’s clear that many people want to get out and travel again. That should be good news for Rolls-Royce to deliver earnings.
2. Attractive long-term economics
The world is getting busier. Many of those people have more disposable income than their parents or grandparents. I think this will translate into increased demand for passenger and cargo aviation. That should bode well for revenue and profits at Rolls-Royce.
In this sense, growing concern about fuel emissions will lead fewer people to fly. But Rolls-Royce is already working to develop aircraft engines that don’t rely on fossil fuels. In the short term, the development costs of such programs can hurt profitability. But I think they will help prepare Rolls-Royce for a future where demand for travel will continue to grow, even if fossil fuels do not.
3. Future dividend potential
Although holders of Rolls-Royce shares will not receive any dividend in 2022, the payout may be refunded in the future.
The firm has raised cash to raise leverage and the loan conditions include a ban on dividend payments before 2023. Rolls-Royce may pay dividends from next year if certain conditions are met.
After the company expanded the number of shares in circulation a few years ago, I would be surprised if Rolls-Royce reached its previous level of dividends, even if the dividend would be as large as before. But I think the company’s entrenched position in a business with high barriers to entry will allow it to become consistently profitable again in the future. That could pay dividends.
Why did I buy Rolls Royce shares?
2022 has been a tough year for Rolls-Royce shareholders so far.
But looking at the investment case from a long-term perspective, I see it as a buying opportunity for my portfolio. I’ve invested in the company this year – and I plan to buy more shares now that they’re trading at pennies.