The name Rolls-Royce (LSE: RR) evokes quality and expense. But while the aeronautical engineer’s engines can cost millions of pounds, Rolls-Royce shares change hands for just pennies each.
As a long-term investor, I do not focus on short-term swings in share prices. But over the longer term, I own shares like Rolls-Royce to try and build my wealth. So, if I had bought into the firm five years ago, would I now be quids in?
Share price collapse
The answer is a resounding no.
The Rolls-Royce share price has not just fallen over the past five years – it has collapsed. Today, the shares trade for 70% less than they did back then.
If I had invested, that would not be the whole story. Rolls-Royce is not currently paying dividends, but it did before it ran into difficulties as a result of government travel restrictions cutting passenger demand.
Still, if I had spent £500 on Rolls-Royce shares five years ago, the dividends would not be as much as the loss in share value. I would have earned around 23.4p per share in dividends so far. A heavily dilutive rights issue in 2020 makes a direct comparison complicated. But even when including dividends, I would not be in profit over the past five years.
Realised loss and paper loss
However, when talking about a falling share price, it is important to remember that it would be what is known as a ‘paper loss’. In other words, while Rolls-Royce shares have fallen in price, unless I had sold them I would not actually have lost money.
Would I have sold them? Hypothetical questions are difficult to answer and I have not owned the shares for five years. But at the moment, I continue to hold my Rolls-Royce shares in the hopes of recovery. Some of the risks that have weighed on the price remain a threat, from subdued passenger demand in some markets to inflation eating into profit margins.
But I also see reasons to be optimistic about business prospects for the company. It has a strong position in a market that I expect to experience long-term demand, in which only a small number of companies have the engineering and manufacturing expertise to deliver the goods. That, along with Rolls-Royce’s prestigious brand, help to give it pricing power. I also see its large installed customer base as a competitive advantage.
My own Rolls-Royce position shows a paper loss, although I bought it less than five years ago. But I have no plans to sell, so for now the paper loss is just that.
Rolls-Royce shares have jumped lately
While the longer term picture is bleak, over the past month, Rolls-Royce shares have jumped by over a quarter.
I think a combination of improving numbers of passenger flying hours, reassurance from the firm on profit margins, and a reassessment of its long-term strengths by investors could help explain this.
I continue to think the shares look cheap while trading for pennies. As I already own quite a few, I have no plans to buy more at the moment. But I am holding my Rolls-Royce shares, hoping the price will be boosted over the long term if the company lives up to its potential.
