Does Rolls-Royce Holdings PLC Pass My Triple Yield Test?

Roland Head asks whether shares in Rolls-Royce Holdings PLC (LON:RR) are now a buy, after this week’s big sell-off?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rolls-Royce

Like most private investors, I drip feed money from my earnings into my investment account each month. To stay invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 75% on its March 2009 low, and the wider market is no longer cheap — it’s getting harder to find shares that meet my criteria for affordability.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

In this article, I’m going to run my investing eye over Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US), to see if it might fit the bill.

The triple yield test

Today’s low interest rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my portfolio, I like to look at three key trailing yield figures — the dividend, earnings and free cash flow yields. I call this my triple yield test:

Rolls-Royce Value
Current share price 1,050p
Dividend yield 2.1%
Earnings yield 6.2%
Free cash flow yield 6.4%
FTSE 100 average dividend yield 2.9%
FTSE 100 earnings yield 5.8%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. Rolls-Royce’s announcement this week that its revenue and profits are expected to remain flat in 2014 triggered a 12% sell-off in the engineering firm’s share price, pushing up its earnings yield to a FTSE-beating 6.2%.

Rolls’ dividend yield remains below average, but it’s worth noting that the firm has net cash, and that the 2013 dividend was covered three times by free cash flow. This suggests that there is plenty of scope for future increases, which should help support Rolls’ share price.

A final point worth noting is that Rolls’ free cash flow yield is roughly equal to its earnings yield, showing that the firm’s paper profits are being converted into cash profits — a sign of a healthy and robust business.

Is Rolls-Royce a buy?

Rolls shares now trade on a fairly average P/E of 15.9, but in my view, this valuation is still quite strong, and combined with the firm’s 2.1% dividend yield, isn’t attractive enough to tempt me to invest.

What’s more, I suspect that Rolls-Royce shares may yet have further to fall, as the firm’s failure to provide any advance warning of this year’s slowdown may affect the credibility of its guidance for 2015.

For me, Rolls-Royce is a hold at the moment, but your view may differ, and it’s certainly a world-class business with a strong moat — very few other companies could do what Rolls does.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in Rolls-Royce Holdings.

More on Investing Articles

Investing Articles

With £10k in savings, here’s how an investor could target a second income of £500 a month

£10k in savings could be the foundation needed towards a powerful second income. Our writer details some steps necessary to…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

£1k invested in the FTSE 100 on ‘Liberation Day’ is now worth…

Jon Smith talks about the volatility in the FTSE 100 in the weeks since the tariff announcements and flags up…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Barclays’ share price is down 7% from March, so is now the right time for me to buy?

Barclays’ share price has dipped recently, which could mean a bargain to be had. I took a deep dive into…

Read more »

Investing Articles

Down 13% since March, does this rising FTSE 250 defence star look an unmissable buy for me?

The FTSE 250 is currently home to many of the big stock stars of tomorrow and I think this high-tech…

Read more »

Investing Articles

Should I buy Aston Martin shares for my ISA while they’re under 70p?

With Aston Martin's shares down hugely across multiple time frames, this writer is wondering if he should snap up some…

Read more »

Senior woman potting plant in garden at home
Investing Articles

Why I prefer investing with Warren Buffett to a FTSE 100 or S&P 500 tracker

When it comes to buying shares, ignoring advice from Warren Buffett is rarely a good idea. But our author thinks…

Read more »

Investing Articles

Forget gold! I prefer UK shares for trying to build long-term wealth

Stock market volatility has sent investors running to safe-haven assets. But for building wealth over time, Stephen Wright prefers UK…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

This S&P 500 stock looks crazily mispriced to me

After hitting a record high on 4 February, this S&P 500 stock crashed hard during the 'Trump slump'. But even…

Read more »