It’s tempting to look back at past stock market winners and hope we can repeat the same success if we buy them now. But in the case of Rolls-Royce (LSE: RR) shares, I definitely wouldn’t want to do that.
That’s because, over the past 10 years, the Rolls-Royce share price has plunged by 75%.
There’s an old stock market disclaimer that past performance is not an indicator of future results. In this case, I sincerely hope it isn’t. But what do I think might happen to Rolls-Royce shares over the next 10 years?
Dividends
Ultimately, for me, the worth of a share is measured by the value of the dividend stream I’m going to get from it in the coming years and decades. On that basis, I don’t care much about what happens to my share prices in the short term.
I mean, if I buy Rolls-Royce shares today with the intention of holding for at least 10 years, why should I care where the share price goes next year? If I don’t intend to sell next year, it simply doesn’t matter.
Buy more?
Well, if it falls, it would mean I could have bought them cheaper if I’d waited a year. But I reckon the obvious way to make up for that is to buy more. That is, providing my long-term view of the company’s prospects is still positive.
So what might Rolls-Royce shares be worth?
If the company can ever get back to 2019 earnings, the current share price would mean a price-to-earnings (P/E) ratio of around 12. That would suggest only a modest share price increase to get it back around the FTSE 100 average.
Dividend return
A return to 2019 dividends would provide a 6% divided yield. That would be attractive, though not too exciting. But if this level of business can be achieved in, say, five years, we might then have five more years of steady growth.
I don’t expect a 10-bagger from Rolls-Royce in the next decade. But I could see Rolls-Royce shares doubling in value. And we could then add any long-term dividend cash to their value.
Shares I might buy along the way would be worth their dividend yields based on my purchase price. If we buy shares today at low prices, we’ll lock in better effective yields than if we wait until the dividends are rising again and share prices are inevitably higher.
Worth more
As long as I think the total value of an investment in 10 years (based on share prices and dividends) would be significantly higher than today’s valuation, it goes on my buy list.
The main thing that might still stop me buying is if there’s another stock out there that I think is even better value. Or perhaps less risky.
And that’s where I stand on Rolls-Royce shares today. If there were no other shares that I found more attractive, I’d buy for sure. As it is, Rolls is on my candidates list with a long-term view.