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Why Rolls-Royce stock can power my portfolio for decades to come

·3-min read
A Rolls-Royce employee works on an engine
A Rolls-Royce employee works on an engine

Established in 1904 in Manchester, Rolls-Royce (LSE: RR) has a long history of producing quality products in automobiles, power systems, and jet engines. In more recent times, the company has shifted its attention to the use of green fuels and nuclear energy. This is alongside its flagship engine business. I think this is a great stock for the long term – let’s take a closer look.

Sustainable aviation fuels (SAFs)

February 2021 marked the first time Rolls-Royce successfully tested the practicality of SAFs on one of its jet engines. The test was conducted near Berlin and involved SAFs composed of renewable products. This includes cooking oil and agricultural waste. It is all part of Rolls-Royce’s plan to achieve net zero carbon emissions by 2050. This tells me that the company is operating with a long-term view in mind. Cleaner air travel will be essential for the aviation industry to flourish.

A successful flight test, in partnership with Boeing and World Energy, was conducted in October 2021 using Rolls-Royce Trent 1000 engines. With the company at the forefront of innovative new technology, I will likely be adding to my position for the long term. However, there are downsides regarding the implementation of SAFs. As a result, current regulations require that regulation jet fuel may only contain a maximum of 50% SAFs. Although this may change in the near future, it limits the use of SAFs in planes using Rolls-Royce engines.

Nuclear power

One newer strand of the business is nuclear power and related infrastructure. This form of energy is significantly cleaner than fossil fuels and is a much less intrusive when mining uranium. The company has been planning the construction of small modular reactors (SMRs) around the UK. The purpose of the SMRs is to provide an alternative to fossil fuels and assist in the global effort to decarbonise. Furthermore, the reactors require only one tenth the space of a traditional nuclear plant. They should be on the grid by the early 2030s.

The SMRs are already attracting interest from foreign investors. In December 2021, the Qatar government announced an £85m investment in the SMR construction. In addition, the UK government will match any funds raised for this project to the amount of £210m. I think that this part of the Rolls-Royce business could stretch far beyond the UK. In other words, the scope for expansion is enormous. This is part of a global effort to bridge the gap during the transition from fossil fuels to sustainable energy. The Chinese government, for instance, announced it was building 150 nuclear reactors over the next 15 years.

Alternatives to long-term investing

I view an investment in Rolls-Royce as a long-term proposition that may not generate gains immediately. This needs to be weighed up with shorter-term uranium mining alternatives. A company like Yellow Cake could provide me with better opportunities for near-term profits. This company buys and sells physical uranium. Yellow Cake enjoyed a 97% increase in the value of its physical uranium holdings from one year ago.

Rolls-Royce is gearing up for the long term. This is evident from its nuclear segment and collaborations on SAFs. There is now international investment in the SMRs and I only expect this to grow in the future. I will be adding more Rolls-Royce stock to my portfolio.

The post Why Rolls-Royce stock can power my portfolio for decades to come appeared first on The Motley Fool UK.

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Andrew Woods owns shares 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

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