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As the year draws to a close, the Rolls-Royce (LSE: RR) share price is losing momentum. That’s hardly surprising given its recent crazy breakneck growth.
Shares in the aircraft engine manufacturer have climbed an unbelievable 1,081% in the last three years. No other FTSE 100 stock can touch it. It’s basically turned itself from a basket case into the UK’s most exciting growth share. It’s still managed to grow 90% in the last 12 months. But is this as good as it gets?
FTSE 100 star
Rolls-Royce is no longer a recovery play. And it’s definitely not a value stock. Investor expectations are sky-high, with a price-to-earnings (P/E) ratio nudging 55. That’s way above the figure of 15 typically seen as fair value.
With a market cap of almost £93bn, share price growth could also be harder to come by. Having said that, CEO Tufan Erginbilgic reckons its proposed fleet of small modular reactor (SMR) nuclear plants could transform Rolls-Royce into the UK’s biggest company.
Today, that honour belongs to drugs giant AstraZeneca, which has a market cap of £212bn. So if Erginbilgic’s optimism proves well founded, the shares could double again. But not in a year. It will be a bumpy journey, as Rolls-Royce relies on governments backing its tech at scale.
Gravity is doing its work. Rolls-Royce shares had to ease off at some point. On 13 November, Erginbilgic confirmed it’s still on track to deliver underlying operating profit of between £3.1bn and £3.2bn in full-year 2025, up an impressive 28% on last year. We’ll find out if he’s right on 26 February. If Rolls undershoots high expectations, we could see a big share price drop on the day.
Even if Erginbilgic overshoots he’d then have to impress an expectant investor base with a new set of targets.
Rolls-Royce isn’t all about the growth, of course. It’s also guiding towards free cash flow of between £3bn and £3.1bn. That’s helping to fund a £1bn share buyback, with more likely to follow and dividends on top. Although a forecast yield of 0.97% is modest for new investors.
Buybacks, dividends, growth
As well as its core civil aerospace operation, Rolls-Royce has a defence department, which has benefitted from growing orders as the West rearms, while its power systems operations should get a boost from AI data centre demand. So there’s a lot for investors to sink their teeth into here.
But as the company grows, so do the challenges, which include trade tariffs and ongoing supply chain issues. And if a recession hits air travel, that will knock revenues from its jet engine maintenance contracts. Some investors may even be looking for an excuse to bank their profits, and be quick to sell.
As someone who holds the shares, I won’t do that. Investors might still consider buying the shares today but personally, I’d think about waiting for a dip. There’s likely to be one at some point in 2026. The exciting news is that I can see plenty of other great recovery stocks on the FTSE 100 today, and I’ll target them instead.
