It’s hard to argue with Rolls Royce (LON:RR.) if you want a company which can produce steady income growth over the long-term with limited risks, but how does it stack up as a value investment at almost 830p a share?
With sales and profits measured in billions, as well as staff measured in tens of thousands across the globe, there are few companies that are safer. In fact the company’s past results are so impressive that I’d be more than happy to join existing shareholders as a part owner of this iconic company… but only at the right price.
Between 2002 and 2012 sales have gone from about 360p to almost 600p; adjusted earnings have gone from 11p to almost 48p and the dividend has moved up from 8p to over 17p today. By every meaningful measure the company has more than doubled its return to shareholders and that is exactly what most investors want to see.
Even better than that, the share price has gone from around 150p in 2002 (or if you timed it right, an incredible 70p in March 2003) to the 830p we see today. Even if you just got in at 150p rather than 70p, you would have seen the share price increase by over 450p. If those returns are not spectacular for a blue-chip stock then I don’t know what is.
Break the returns down into their component parts
Returns flow to shareholders from various sources, so let’s have a look at where they came from for our Rolls Royce investor between 2002 and now.
Dividends – The easiest thing to work out is the dividend. Between 2002 and 2012 (inclusive) the total pay-out has been just over 118p.
Earnings growth – With earnings at 11p then and 48p now, earnings have grown by 336%. Assuming the PE ratio had remained the same (at 13.6) until today then the shareholder would have gained about 504p from the growth of the company.
PE ratio changes – As Mr Market’s mood changes, the valuation given to any one company change change by a surprising amount. You only have to look at a chart of Rolls Royce – a huge global company with a relatively steady business – to see that its market value halved in about a year in the initial stages of the credit crunch. For those investors that hung…
