Rolls-Royce Announces Major Share Buyback Amid Record Performance

Rolls-Royce GB00B63H8491

Rolls-Royce is poised to conclude 2025 with exceptional operational and financial results. With a successful restructuring now in the rearview mirror, the company's leadership is sending a powerful message to shareholders ahead of the full-year report: a new share repurchase program worth hundreds of millions of pounds aims to further bolster the equity. This strategic move underscores a period of remarkable transformation for the engineering giant.

The company's confidence is not unfounded. Its operational performance continues to deliver strong arguments for the current market valuation. In December, Rolls-Royce secured one of its most significant defense contracts in recent decades for its land systems division. The armored vehicle manufacturer KNDS placed an order for more than 300 mtu MB 873 engines to power new Leopard 2 main battle tanks.

Deliveries for this order, which will supply several European armies including those of Germany, Lithuania, Sweden, the Netherlands, and the Czech Republic, are scheduled for 2026. Dr. Jörg Stratmann, CEO of Rolls-Royce Power Systems, characterized the deal as one of the most substantial of its kind in a long time—a direct reflection of Europe's heightened security landscape.

Concurrently, Rolls-Royce has commenced testing the AE 1107 engine for the U.S. Army's MV-75-FLRAA program. These tests represent a crucial milestone on the path to prototype delivery, highlighting the group's pivotal role in future military aviation initiatives.

A Bold Capital Return Initiative

On December 16, the company unveiled a new interim share buyback program of up to £200 million. Set to commence on January 2, 2026, and run through February 24, 2026, the program will be executed by UBS's London branch. Its explicit purpose is capital reduction, meaning the repurchased shares will be canceled before the publication of the 2025 full-year financial results.

The context of this announcement is particularly noteworthy. Rolls-Royce had only just completed a £1 billion share repurchase program in November. The immediate follow-on initiative strongly suggests management anticipates sustained robust cash generation and sees clear scope for additional shareholder returns.

This confidence is mirrored in the market. Since the start of the year, the share price has surged approximately 85% in Euro terms and is trading just a few percentage points below its 52-week high.

Valuation Reflects a Transformed Trajectory

Despite these solid fundamentals, the stock's valuation has become demanding. The forward price-to-earnings ratio now stands at around 35, significantly above the company's historical average. The market is clearly treating Rolls-Royce as a growth stock with above-average earnings momentum.

Analyst support remains strong. Bank of America, for instance, raised its price target to 1,615 pence, specifically citing improved prospects for shareholder returns via dividends and buybacks.

On the credit side, Moody's upgraded the company's rating to Baa1 in November, acknowledging its progress. This investment-grade status typically improves financing conditions and enhances flexibility for future investments or capital returns.

The Stunning Results of a Three-Year Turnaround

The depth of the transformation launched in 2023 is best illustrated by the performance numbers. An investment of £2,000 in Rolls-Royce shares three years ago would be worth approximately £25,400 today. Back in December 2022, the share price was at 91 pence, shortly before CEO Tufan Erginbilgiç initiated the comprehensive turnaround plan.

The key financial targets and achievements now include:

• Forecast 2025 operating profit: £3.1 to £3.2 billion
• Expected 2025 free cash flow: £3.0 to £3.1 billion
• Resumption of dividend payments following their pandemic-era suspension
• Market capitalization exceeding £96 billion

This powerful combination of margin improvement, strong cash flow, and a reinstated shareholder return policy explains why the market is willing to pay a premium for the equity.

The Road Ahead and Key Dates

Attention now turns to a pivotal upcoming event: the release of the full-year 2025 results on February 26, 2026. The newly announced, tightly timed share buyback, concluding just before this date, acts as a strategic bridge. It helps stabilize the supply-demand balance for the stock while demonstrating management's commitment to actively steering the capital structure.

Operationally, the company is currently benefiting from two powerful trends: the robust recovery in civil aviation and increased defense spending across Europe. However, with the share price up nearly 90% over a twelve-month period and trading well above its historical valuation average, there is little room for significant disappointment in the coming financial results or the outlook for 2026.