With over 32.5 million shares traded on average each day, Rolls-Royce (LSE:RR) continues to be one of the most popular stocks on the London Stock Exchange.
The British engineering enterprise plays a pivotal role in the aerospace sector. And following the reveal of its mini-modular nuclear reactors, it may soon become the cornerstone of the UK’s energy sector.
With that in mind, it’s not difficult to understand why investors are drawn to this business. But it’s difficult to justify its popularity when looking at the share price performance since 2018.
Underwhelming performance
Over the last five years, the returns generated by Rolls-Royce shares have been, for lack of a better word, awful. In fact, the FTSE 100 stock has dropped by nearly 50% during this period. And while the pandemic certainly didn’t help matters, problems at this company began well before, with the stock locked into a downward trajectory since 2014.
Based on this shift in market capitalisation, a £1,000 investment in June 2018 would currently be worth approximately £520. Obviously, this doesn’t include dividends. But even after taking shareholder payouts into account, the results barely change.
Five years ago, Rolls-Royce shares were trading for just shy of 287p. Therefore, a £1,000 investment would have roughly translated into 348 shares. Prior to cancelling its dividend in 2020, the group paid out roughly 8.04p per share.
This would offset the decline in valuation by a grand total of £27.98, bringing the total loss on investment to -45.2% versus the FTSE 100’s +27% over the same period. As I said, the performance has been awful.
Can Rolls-Royce shares bounce back?
As disastrous as this business has been, recent decisions made by the newly appointed CEO, Tufan Erginbilgic, provide a glimmer of hope.
After taking the corner office, Erginbilgic launched a strategic review of the entire business. This led to the discovery of seven company segments in dire need of improvement. On the back of making some strategic disposals, the unfortunate termination of thousands of employees, and a long-awaited recovery within the aerospace industry, Rolls-Royce is finally free cash flow positive again by £500m.
In a recent trading update, management confirmed the business is on track to deliver operating profits between £800m to £1bn by the end of 2023. And free cash flow is set to grow even further to between £600m and £800m.
While it’s still too early to judge Erginbilgic’s performance, he’s certainly off to a terrific start. And it would seem other investors agree, since Rolls-Royce shares are up 63% in the last six months. However, there’s still a long way to go before recovering to 2018 levels.
Personally, I’m becoming increasingly optimistic about the potential for a comeback. But I’m not tempted to add the business to my portfolio. The group still has nearly £6bn of loans & equivalents on its balance sheet that must be sorted. And the rising interest rates aren’t exactly helping matters.
But should the company continue to expand its free cash flow, the health of the balance sheet should start to improve. At which point, I may have to reconsider my position on this stock.
