Rolls-Royce Announces Fresh Share Buyback as Transformation Yields Cash

Rolls-Royce GB00B63H8491

The board of Rolls-Royce has unveiled a new initiative to return capital to shareholders, signaling continued confidence in its ongoing financial turnaround. The aerospace and power systems group confirmed a forthcoming share repurchase scheme, reinforcing a strategy that has seen substantial cash distributions resume following the pandemic-era drought.

In a statement released Tuesday, the company announced an interim share buyback program with a maximum value of £200 million. This new plan is scheduled to commence on January 2, 2026, and is set to conclude no later than February 24, 2026. UBS AG London Branch will act as the executing partner, independently purchasing ordinary shares of 20 pence each on the London Stock Exchange within pre-agreed parameters.

The acquired shares will be cancelled, thereby reducing the company’s share capital and providing support for earnings per share. This £200 million program is designed as a complement to the £1 billion buyback completed in November 2025. The timing precedes the publication of the full-year 2025 results, scheduled for February 26, 2026. Management has indicated that a decision regarding the total buyback volume for the entire 2026 year will be made alongside those annual results.

Financial Foundation Supports Payouts

This return of capital is made possible by a markedly stronger operational and financial performance. For the first half of 2025, Rolls-Royce reported an underlying operating profit of £1.7 billion, a 50% increase year-over-year. Revenue reached £9.1 billion, up 13%. Notably, the Civil Aerospace division achieved a margin of 24.9%, a significant rise from 18.0% in H1 2024. Free cash flow generation was robust at £1.6 billion, a 37% improvement.

Based on this trajectory, management has raised its guidance for the full year 2025. The company now anticipates an underlying operating profit between £3.1 billion and £3.2 billion, with free cash flow projected in the range of £3.0 billion to £3.1 billion. Combined with dividend payments, total shareholder returns for 2025 are estimated at approximately £1.9 billion, a stark contrast to the period when the dividend was suspended.

Market Valuation and Reaction

Despite the announcement of additional capital returns, Rolls-Royce shares experienced a slight decline of around 0.6% on the day. The stock remains in positive territory over a twelve-month horizon. From a valuation perspective, the market continues to price in a significant growth premium, with the shares trading at a price-to-earnings ratio of approximately 54. This multiple sits well above the FTSE 100 average, reflecting investor belief in the sustainability of the turnaround while also suggesting future growth expectations are largely incorporated into the current price.

Analyst Sentiment and Credit Upgrade

Major financial institutions maintain constructive views on the equity:

• JP Morgan reiterates a "Buy" rating with a price target of 1,320 pence, advising investors to look past short-term volatility and focus on strong fundamentals.
• Morgan Stanley has set a target of 1,280 pence.
• Morningstar assigns a fair value estimate of 1,120 pence and a "Narrow Moat" rating.
• The consensus price target among analysts stands at about 1,242 pence, indicating perceived upside potential.

Furthermore, Rolls-Royce received a credit rating upgrade in August 2025. S&P Global Ratings lifted its rating from 'BBB' to 'BBB+', citing sustained improvements in profitability and cash generation. The agency forecasts adjusted EBITDA margins of 18-19% over the next two years, with free operating cash flow of around £3 billion in 2025 and up to £3.3 billion in 2026. A stronger credit profile lowers financing costs and provides greater flexibility for future capital returns.

Broad-Based Operational Momentum

The capital return program is a component of the wider transformation led by CEO Tufan Erginbilgic since 2023, with progress evident across all core business units:

Civil Aerospace: Demand remains high, supported by major engine orders from carriers like IndiGo and Malaysia Airlines, as well as lessor Avolon. Large engine flying hours have recovered to 109% of 2019 levels. Enhanced reliability and "time on wing" for Trent engines are boosting service margins.

Defence: The division benefits from rising global defence budgets. It has secured orders exceeding £1.5 billion with the UK Ministry of Defence (MoD) and the US Department of Defense (DoD), including orders for more than 300 engines for Leopard battle tanks.

Power Systems: The business is experiencing strong growth, particularly in data centre backup power generation. Mid-term revenue expectations have been raised to approximately 20% annual growth, with public sector-related business anticipated to grow an additional 12-14% per year.

Small Modular Reactors (SMR): Rolls-Royce was selected as the sole provider for the UK's first SMR program. The goal is for SMR activities to become profitable and cash flow positive by 2030.

This diversification across growing end-markets reduces reliance on any single sector and enhances long-term earnings visibility.

Forward Timeline and Targets

Key upcoming dates for investors include the start (January 2, 2026) and planned conclusion (February 24, 2026) of the interim buyback, followed by the 2025 full-year results on February 26, 2026.

Looking to the medium term, the company is targeting an underlying operating profit of £3.6 billion to £3.9 billion and free cash flow of £4.2 billion to £4.5 billion by 2028. Successful execution toward these goals, while managing supply chain risks and potential trade tariffs, should provide the financial capacity for continued substantial share buybacks and dividends beyond 2026.