The name Rolls-Royce (LSE: RR) evokes quality and expense. But while the aeronautical engineer’s engines can cost millions of pounds, Rolls-Royce shares change hands for just pennies each.
As a long-term investor, I do not focus on short-term swings in share prices. But over the longer term, I own shares like Rolls-Royce to try and build my wealth. So, if I had bought into the firm five years ago, would I now be quids in?
Share price collapse
The answer is a resounding no.
The Rolls-Royce share price has not just fallen over the past five years – it has collapsed. Today, the shares trade for 70% less than they did back then.
If I had invested, that would not be the whole story. Rolls-Royce is not currently paying dividends, but it did before it ran into difficulties as a result of government travel restrictions cutting passenger demand.
Still, if I had spent £500 on Rolls-Royce shares five years ago, the dividends would not be as much as the loss in share value. I would have earned around 23.4p per share in dividends so far. A heavily dilutive rights issue in 2020 makes a direct comparison complicated. But even when including dividends, I would not be in profit over the past five years.
Realised loss and paper loss
However, when talking about a falling share price, it is important to remember that it would be what is known as a ‘paper loss’. In other words, while Rolls-Royce shares have fallen in price, unless I had sold them I would not actually have lost money.
Would I have sold them? Hypothetical questions are difficult to answer and I have not owned the shares for five years. But at the moment, I continue to hold my Rolls-Royce shares in the hopes of recovery. Some of the risks that have weighed on the price remain a threat, from subdued passenger demand in some markets to inflation eating into profit margins.
But I also see reasons to be optimistic about business prospects for the company. It has a strong position in a market that I expect to experience long-term demand, in which only a small number of companies have the engineering and manufacturing expertise to deliver the goods. That, along with Rolls-Royce’s prestigious brand, help to give it pricing power. I also see its large installed customer base as a competitive advantage.
My own Rolls-Royce position shows a paper loss, although I bought it less than five years ago. But I have no plans to sell, so for now the paper loss is just that.
Rolls-Royce shares have jumped lately
While the longer term picture is bleak, over the past month, Rolls-Royce shares have jumped by over a quarter.
I think a combination of improving numbers of passenger flying hours, reassurance from the firm on profit margins, and a reassessment of its long-term strengths by investors could help explain this.
I continue to think the shares look cheap while trading for pennies. As I already own quite a few, I have no plans to buy more at the moment. But I am holding my Rolls-Royce shares, hoping the price will be boosted over the long term if the company lives up to its potential.
The post If I’d invested £500 in Rolls-Royce shares 5 years ago, would I be in profit? appeared first on The Motley Fool UK.
C Ruane has positions in Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2022