I’ve been watching Rolls-Royce Holdings (LSE: RR.) shares since the big crash. And I’ve been looking for signs that a recovery is on the cards.
I don’t try to get in at the bottom to make the most gains. There’s too much risk down there, as we’ve seen with a few past false starts.
I’ll leave the biggest profits for others. And I won’t buy until things look a bit safer. But three things make me think we might be at that point.
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Resilience
In the latest wobble, the FTSE 100 fell 17% from its record high of over 8,000, dropping more than 500 points.
In the same time, Rolls-Royce shares lost only 10%. That makes me think there might have been a shift in sentiment.
This time, it wasn’t the same as past market glitches. Over the past few years, Rolls shares have been far more volatile than the index.
I know this is a short timescale to look at. And on its, own it doesn’t mean much. But I do see good reasons to support a mood change.
Results
Rolls was hit by the Covid slump. And since then, we’ve all been waiting for one specific turning point. The board predicted a return to positive cash flow by the end of 2022.
What a firm says is a long way from cold hard numbers on a set of results, though. But we have those now too.
For FY22, Rolls delivered £505m in cash flow. I rate that as a solid turnaround from the huge cash bleed of 2021.
Debt is down, mostly thanks to disposals. But if cash flow really is back to stay, we should see it reduce further from cash from actual profits.
Dividend
The final proof for me would be the return of dividends. Now, I don’t expect it any time soon. And Rolls itself isn’t talking about it yet.
And, in fact, I wouldn’t want to see the firm hand out cash right now. Using cash to pay down debts further must be a top priority.
But some forecasts already have a dividend down for as soon as 2024. The yield would be less than 1%. And I think it’s more in hope than anything else.
But I like the fact that the City even dares to think about a dividend at this stage.
Do I think Rolls-Royce will pay a dividend within the next five years? Yes, I very much do. And by that time, I think the yield could reach a good level.
Verdict
A lot could still go wrong, and these things I raise here all come with their own risks.
Rolls shares are still on a high price-to-earnings (P/E) ratio of around 30. So there’s not a lot of safety there in case of any troubles ahead.
But I do think I see a set of positive trends now. And I rate Rolls-Royce shares a buy for those with a 10-year view. Rolls is on my list for when I next have the cash.
