Will the Rolls-Royce share price ever reach £5?

Image source: Rolls-Royce plc
Image source: Rolls-Royce plc

The Rolls-Royce Holdings (LSE: RR.) share price hit an all-time high in early 2014, when it briefly broke through 440p.

That was the end of a long bull run, and then the wheels came off. Today, after the pandemic crash, Rolls shares haven’t even got back to half that peak value.

So isn’t it a bit premature to be thinking about 500p?

Long-term goals

When I check broker forecasts, I don’t pay much attention to share price targets. I just want to see earnings and dividend growth, and the share price should surely take care of itself if those happen.

But new investors can have decades of investing ahead of them. And, starting out today, I’d want to think about the long-term prospects for any shares I buy.

So whether a 200p share today could reach 500p in the next 20 years seems like a fair question.

After all, it would take an average annual return of just 4.7% to get there. And if I didn’t think a stock could do that, I think I’d look elsewhere.

Total returns

Now, total returns are what really matter, not just share price growth. And growth investors buying Rolls-Royce shares today might be hoping to turn their £2 coins into £5 notes sooner than that.

I think they could stand a good chance. But how might it happen?

Over the past 20 years, we’ve seen average annual FTSE 100 returns of 6.9%. That’s ahead of the 4.7% we’d need from Rolls-Royce in the next two decades. And if, instead, it managed that 6.9%, we could see our 500p per share in just 14 years.

Share price

We’re still talking about total returns here, not share price gain. And it will be split between price growth and dividends.

Right now, Rolls isn’t paying any dividends. The City does expect to see them in the next couple of years, though.

What might we get in the next 20 years? In the five years leading up to Covid, Rolls-Royce dividends averaged around 2%.

If it would take 4.7% a year for the shares to reach 500p, 2% dividends would take that up to 6.7%. And that’s still a bit less than the Footsie has managed in the past 20 years.

What now?

I’m not trying to predict anything. But the idea of Rolls-Royce shares reaching 500p for a long-term investor doesn’t seem at all outrageous.

I’ve worked on a 20-year outlook, and we might hope for better than that. But I’ve also only used average returns, which a recovering stock returning to earnings growth might beat.

If it looked like it could take 50 years to reach 500p, I’d conclude that Rolls stock is overvalued. And if it looked like an easy short-term goal, it might be a no-brainer buy.

As it is, I’d rate Rolls shares as a fair long-term investment, but not obviously cheap right now.

The post Will the Rolls-Royce share price ever reach £5? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. 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.

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