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Right now, across the world, thousands of people are up in the air thanks to engines made by Rolls-Royce (LSE: RR). But in the past few years, Rolls-Royce shares have been up in the air too, moving around in various directions.
So, if I had put £300 into the company at the start of January, what would I now have to show for it?
The simple answer is that today, my Rolls-Royce shares would be worth only around £173 – and I would have had no dividends so far. But could that fall of 42% in the value of Rolls-Royce shares in 2022 — the same as over the past 12 months — present a buying opportunity for my portfolio? I think so and have been buying. Here are three reasons why.
1. Improving business outlook
Looking at how Rolls-Royce shares have performed so far in 2022, it might seem that the business outlook is getting worse.
But is that really the case? Earlier in the year, tourism was still recovering in fits and starts. But with the summer season behind us, it is clear that a lot of people are keen to get out and travel again. That should be good news for servicing revenues at Rolls-Royce.
2. Attractive long-term economics
The world is getting more crowded. A lot of those people have higher disposable incomes than their parents or grandparents did. I think that translates to increased demand for passenger and cargo aviation. That should be good for revenues and profits at Rolls-Royce.
Against that view, it may be that growing concern about fuel emissions will lead fewer people to fly. But Rolls-Royce is already working to develop aircraft engines that do not rely on fossil fuels. In the short term, the development costs of such programmes could hurt profitability. But I think they help prepare Rolls-Royce for a future in which I expect the demand for travel to keep growing, even if fossil fuels become less common.
3. Future dividend potential
Although owners of Rolls-Royce shares have not received any dividends in 2022, the payout may be restored in future.
The firm raised cash to boost liquidity during the pandemic and part of the loan conditions was a prohibition on paying dividends before 2023. If certain conditions are met, Rolls-Royce will be able to pay dividends from next year onwards.
After the company expanded the number of shares in circulation a couple of years ago, I would be surprised if dividends are as big as they used to be, even if Rolls-Royce reaches its old profit levels. But I do think the firm’s entrenched position in a business with high barriers to entry could enable it to be consistently profitable again in future. That could fund dividends.
Why I’ve bought Rolls-Royce shares
2022 has been a torrid year so far for holders of Rolls-Royce stock.
But looking at the investment case from a long-term perspective, I see that as a buying opportunity for my portfolio. I have invested in the firm this year — and would consider buying more shares now, while they trade for pennies.