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He rolls royce (LSE:RR) stock price soared in 2023. Even as the FTSE 100 experienced turmoil in March, the engine maker’s price remained strong.
Since January 1, Rolls-Royce shares have risen an impressive 61% in value. And yet, at first glance at least, the company still looks like one of the UK’s most valuable blue chip stocks.
City analysts expect annual earnings to rise 156% by 2023. This leaves the company operating with a price-to-earnings (PEG) growth ratio of just 0.2.
Any reading below 1 indicates that a stock is undervalued.
Growth, Value AND Revenue
Rolls-Royce shares clearly give growth and value investors something to get excited about. However, brokers are also suggesting that Engineer could also be a great dividend stock to buy today.
This is because the company, which has not paid dividends since 2019, intends to restart its payment policy starting this year.
Granted, a projected dividend of 1.63 pence per share for 2023 isn’t the biggest. In fact, this sits at a dividend yield of 1.1%, well below the 3.6% FTSE 100 average.
However, predictions of strong dividend growth still make Rolls-Royce stock worth considering for passive income. In 2024, the total payment is projected to rise 81% year-over-year to 2.95 pence.
a bright prospect
City experts predict that its profits will grow strongly in the coming years. This is mainly due to the rebound in civil aerospace activity which, in turn, is driving demand for engineering after-sales services.
The International Civil Aviation Organization (ICAO) has forecast that passenger demand “will quickly recover to pre-pandemic levels on most routes by Q1”, illustrating the bright outlook for airlines and aerospace businesses.
It also estimates that total passenger demand will increase by 3% year-over-year in 2023.
A healthy civil aviation market is essential for Rolls. It generates about 45% of the revenue from the construction and maintenance of aircraft engines.
Things are looking very healthy elsewhere, too. New contracts continue to pour into the Rolls Defense division. And the order book at its Power Systems unit is at all-time highs.
debt problems
Having said all this, I am not prepared to buy Rolls-Royce shares today. My main concern is the size of the company’s debt pile.
Net debt stood at £3.3bn at the end of 2022. And the company could struggle to service it if market conditions suddenly worsen again.
Airline ticket sales could weaken again if higher-than-normal inflation persists and economic conditions remain difficult. On top of this, Rolls’ profits may take a hit if supply chain woes and high-cost inflation continue.
This is what I’m doing now
Such high debts cast a shadow over how Rolls-Royce will finance its cash-intensive development programmes.
Designing and building aircraft engines, nuclear reactors, and other complex hardware isn’t cheap. And having a lower budget to operate compared to rival companies could significantly compromise earnings growth.
Future dividends could also be compromised due to this combination of high bills and heavy debt. So I certainly wouldn’t buy Rolls stock for passive income.
The company’s recovery could well continue into 2023. But overall, I’d rather buy other cheap dividend-paying stocks right now.
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