I own shares in Rolls-Royce (LSE: RR). But lately they have been unrewarding. Over the past year, Rolls-Royce shares have fallen 15% in value. They also offer me no dividend. So, at this point, why do I hold them?
Growth prospects
The main reason for me to own Rolls-Royce shares is because I think the company has solid, though likely unspectacular, long-term growth prospects.
Consider its key areas of business focus, such as aircraft engine servicing and energy equipment manufacturing. One risk some investors see is a decline in demand for aviation hurting sales for engine makers. But I expect demand for flying and energy to be robust over the long term. There may be changes in technology to offset the negative environmental impact of such activities, but I do not foresee a sustained, dramatic fall in demand. In fact, a growing global population makes it likely that both flight passenger numbers and energy use will continue to grow over time.
The barriers to entry for these industries are high. Success requires skilled engineering teams, costly factories and the ability to manage complex global supply chains. Rolls-Royce is one of only a handful of successful large-scale aircraft engine makers worldwide. That alone, I think, should help it keep growing broadly in line with the industry.
I also expect European and North American nations to increase their defence spending considerably over the coming decade due to geopolitical tensions and security concerns. That could be a consistent growth driver for business in Rolls-Royce’s defence division.
Income outlook
Historically, one reason many investors held Rolls-Royce shares was for the juicy dividends. Right now, though, the dividend remains cancelled. So owning the shares offers me no immediate prospect of income. What about the future?
For the rest of this year, the firm will not pay dividends. That financial austerity is required as part of a loan agreement reached during the pandemic. In theory, if the engineer meets certain criteria, payouts could restart next year.
Currently, however, I see limited grounds for optimism when it comes to the prospect of anything more than a token dividend next year. Although business performance is improving, it remains far below what it once was.
The company is still firmly in recovery mode in my view and ongoing risks like a sudden downturn in aviation demand could hurt revenues and profits in years to come. Rolls-Royce issued a huge number of new shares during the pandemic to boost liquidity. That means the cost of simply paying the old dividend for each share would now be much higher than it was then.
Why I own Rolls-Royce shares
With some strong income shares available elsewhere in the market right now, I would not buy more Rolls-Royce shares for my portfolio if I was focussed on dividends.
When it comes to growth, though, it is a different story. Rolls-Royce shares currently trade for pennies, but I see reasons to be optimistic about the long-term growth prospects for the company. That is why I continue to own the shares and would consider buying more.
