Rolls-Royce shares: records fall but forecasts still conservative

Despite increasing its own guidance for the full year, some analysts still think the company is being overly cautious. Graeme Evans has the details.

31st July 2025 15:20

Graeme Evans from interactive investor

Credit: Rolls-Royce via Flickr

The Nvidia-like performance of Rolls-Royce Holdings (LSE:RR.) shares continued today after more beat-and-raise results and a dividend surprise helped its valuation surge above £90 billion.

Rolls overtook British American Tobacco (LSE:BATS) to join the top five of the FTSE 100’s biggest companies, having extended its remarkable share price rise from a lowly 100p in early 2023 to as high as 1,108.5p.

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According to FactSet figures quoted by MarketWatch, the shares have returned 64% a year over the last five years. That compares with NVIDIA Corp (NASDAQ:NVDA)’s return of 76% over the same period.

Investors who participated in the company’s £2 billion November 2020 rights issue by acquiring heavily discounted shares at a price of 32p, are sitting on upside of more than 3,300%.

Unsurprisingly, plenty of retail investors chose to lock in profits following today's advance as Rolls ranked the most-traded stock on the ii platform. Only 21% were buyers of the shares.

The bounce for shares was driven by a 43% beat on half-year earnings and improved guidance for 2025, which at least two City firms said still looked conservative based on current trends.

The new ranges for operating profit and free cash flow represent upgrades of 9-13% at their midpoints, which Morgan Stanley said implied lower sequential delivery in the second half.

The bank said the same could be said in relation to 2028 guidance, which is for underlying operating profit of £3.6 billion-£3.9 billion and free cash flow of £4.2 billion-£4.5 billion.

Morgan Stanley said these targets have been derisked, noting that today’s results showed all three divisions already within the 2028 margin guidance range.

It added: “Taken together, the reasons to own Rolls remain very much intact, and we think the shares deserve to meaningfully outperform today.”

They reached mid-afternoon 93.8p higher at 1,081.8p.

UBS first recommended buying the shares in March 2023, when they were at 153p, before making six upgrades to its price target to stand at 1,075p earlier this month.

It said today: “While the new guidance may be in line with investor expectations we believe it will be taken as conservative, and consensus is likely to upgrade 2028 and long-term estimates in response to this print.”

The biggest beat in today’s results involved the jump in half-year operating margin in civil aerospace to 24.9% from 18% a year earlier.

Despite supply chain challenges and engines flying hours still only 109% of 2019 levels, the division topped consensus by 94% with a 63% rise in operating profit to £1.2 billion.

Power Systems also reported a big improvement in operating margin to 15.3% from 10.3%, primarily driven by continued profitable growth in generation across data centres.

With the Defence margin holding firm at 15.4%, the group reported an overall rise in operating profit of 50% to £1.7 billion. This helped to drive free cash flow to £1.6 billion from £1.2 billion the year before.

Chief executive Tufan Erginbilgic said a focus on strategic initiatives, operational effectiveness and performance management drove the strong first-half performance.

He added: “Our multi-year transformation continues to deliver. Our actions led to strong first-half year results, despite the challenges of the supply chain and tariffs.

“We are continuing to expand the earnings and cash potential of Rolls-Royce.”

Having recently returned to the dividend ranks with a full year distribution of 6p a share, Rolls today declared an interim award of 4.5p for payment on 18 September. That was much higher than the 3p a share forecast by UBS.

The group is part way through a £1 billion share buyback programme, meaning the amount set to be returned to shareholders in 2025 will total £1.9 billion.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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