As Rolls-Royce buys its own shares, should I buy more too?
Since I bought shares in Rolls-Royce Holdings (LSE:RR.) they’ve nearly doubled in value. And those who bought a couple of years earlier than I did have enjoyed even bigger gains. But itâs human nature to think that the strong rallyâs going to end soon.
However, the FTSE 100 aerospace, power systems, and defence group continues to prove the doubters wrong. Therefore, has the time come for me to buy more Rolls-Royce shares? Letâs see.
To buy or not to buy?
One company thatâs buying the groupâs shares is Rolls-Royce itself. On 26 February, it announced the start of a £2.3bn share buyback programme, to supplement the £200m bought since the start of the year. This is equivalent to approximately 2.1% of the groupâs current (16 March) stock market valuation.
But share buybacks can be controversial.
I buy shares to build wealth. When a company buys its own shares, it doesnât change its operational performance. In fact, it reduces its overall value by diminishing its bank balance. Indeed, critics argue that itâs a poor use of surplus cash.
However, I suspect most management teams disagree. Reducing a companyâs share count will increase earnings per share (EPS), all other things being equal. Many executive pay packages include boosting EPS as one of the key metrics.
Warren Buffettâs also a fan. But only, he says, if ârepurchases are made a value-accretive pricesâ. He adds: âwhen a company overpays⦠the continuing shareholders loseâ. So is Rolls-Royce paying too much for its own stock?
Well, with a historic price-to-earnings ratio of around 43, the groupâs shares aren’t cheap. The £2.3bn set aside for the remainder of 2026 will buy approximately 182m of them at the current price. Three years ago, it would have bought over 1.3bn more.
However, the group has repeatedly upgraded its forecasts in recent years. In these circumstances, a high earnings multiple can be justified. The continued growth in both profit and cash is giving momentum to its share price.
| Date/2028 targets | Underlying operating profit (£bn) | Free cash flow (£bn) | Underlying operating margin (%) |
|---|---|---|---|
| 31.7.25 | 3.6-3.9 | 4.2-4.5 | 15-17 |
| 26.2.26 | 4.9-5.2 | 5.0-5.3 | 18-20 |
But any sign that these targets aren’t going to be met and there could be a significant loss of investor confidence and a rapid share price correction.
Another risk is a prolonged war in the Middle East. The grounding of flights and rising jet fuel costs could affect the number of hours that its engines are used by airlines.
Fingers in other pies
But data centre growth is helping the groupâs power systems division.
And as unpalatable as it might be, global instability is likely to boost its defence business. The group claims to be the âincumbent supplier on the main European NATO platformsâ and says itâs âwell positionedâ to support President Trumpâs plans to spend more on the US military. Before the current conflict started, the order backlog for this part of the group was £17.4bn. This is equivalent to three years of revenue.
Overall, I think the stockâs still worth considering despite its recent strong rally. Even so, I donât want to buy any more shares in the group. Why? Well, I believe that itâs important to have a diversified portfolio. Savvy investors know not to have too many eggs in one basket. However, I believe the groupâs shares still have further to climb over the long term.
The post As Rolls-Royce buys its own shares, should I buy more too? appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls-Royce Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?
More reading
- Is the party finally over for Rolls-Royce shares?
- What £5 a day invested in a SIPP could be worth at retirement
- A 2026 stock market crash could be an ultra-rare chance to build a £1m portfolio
- The stock market hasnât crashed yet. Make these 3 moves before it does
- AI may look like a bubble. But what about Rolls-Royce shares?
James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
