UBS Maintains Bullish Outlook on Rolls-Royce Shares

Rolls-Royce GB00B63H8491

Despite a turbulent start to 2026, with shares retreating approximately 12 percent, Rolls-Royce equity has delivered a spectacular performance over the preceding twelve months. This impressive long-term trajectory continues to captivate investors, even as the stock's now ambitious valuation sparks debate. Analysts at UBS, however, offer a reassuring perspective, citing robust operational progress as justification for anticipating further share price appreciation.

The Swiss banking giant UBS does not believe the rally has run its course. Its research team has reaffirmed a "Buy" rating for the British engine manufacturer and increased their price target to 1,625 pence. This adjustment implies significant upside potential from current trading levels. The analysts' sustained optimism is primarily driven by the enduring recovery in global civil aviation.

A critical metric for the company's business model—engine flying hours—has now reached 109 percent of pre-pandemic levels. This figure is vital because a substantial portion of Rolls-Royce's revenue stems from long-term, usage-based maintenance contracts.

Valuation Concerns Tempered by Earnings Momentum

Strong fundamental improvements underpin this expert confidence. For the 2025 fiscal year, the market anticipates an operating profit and free cash flow each exceeding £3 billion. This success, however, comes at a cost: the stock is trading at a forward price-to-earnings (P/E) ratio above 36, a significant premium to its historical average. Market observers note that recent profit growth has actually outpaced the share price advance, with earnings per share projected to have doubled in the first half of 2025.

Capital Return Moves to the Forefront

Alongside operational performance, the company's capital allocation strategy is increasingly drawing investor attention. Bolstered by a strengthened liquidity position, management has announced a share buyback programme worth £1 billion, to be completed by the end of 2026. The stock is also regaining appeal for income-focused investors: forecasts point to a dividend of 10.6 pence per share in 2026, with a potential increase to 12 pence the following year.

While long-term projects, such as small modular reactors (SMRs), provide additional strategic appeal, the immediate focus rests on the disciplined execution of the buyback scheme and cash flow generation. The key determinant for the share price's future trajectory will be the company's ability to meet these high expectations in upcoming quarterly reports.