Patience pays off for Rolls-Royce

published 3 November 2005

Investors have had to be patient over the last five years as Rolls-Royce (RR) has focused more on investing in its business than growing its profits. However, those years of investment are now paying off and it looks likely that a "thrust of upbeat investor sentiment" should soon power the aero engine maker onward and upward again, says Steven Frazer in Shares. The company already has a 40% share of the global civil aero engine market, which is reflected in the high level of orders it has received so far this year. These include a $2bn deal with Northwest Airlines for its Trent 1,000 engines, a $800m deal with China Air and a $400 deal with Polish carrier LOT. Rolls-Royce has also had orders to supply Japanese carrier ANA and Air New Zealand.

But while these huge engine orders are the ones that hit the headlines, it is the ongoing and long-term supply and servicing business that stems from them which supplies Rolls-Royce with its bread and butter. The company has managed to double its base of installed engines to 54,000 over the last decade and, although most of these are in good shape for now, they will "need much more TLC and high-margin spare parts as age creeps up on them", says Frazer. This in turn will provide Rolls with a "significant income stream well into the future".

But perhaps the best sign for investors is that the company was able to raise its first-half dividend this year - for the first time since September 11th - so that the shares will now provide a "reasonable" 2.5% yield. Earnings in 2006 are expected to rise by almost 20% on top of this year's 50% earnings-per-share hike, says Frazer. Yet a p/e of 14 is "barely in line with the sector, in spite of Rolls's rosier-than-average prospects". Buy.

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Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.