Rolls-Royce Holdings has had one of the more complicated months of its remarkable multi-year recovery. The stock, which delivered close to a 950% gain over five years and hit an all-time high of 1,420p in February, has since retreated to around 1,177p on the London Stock Exchange as of April 2, trading below both its 20-day and 50-day moving averages.
That pullback, roughly 22% off the peak, has left investors trying to work out whether this is a routine correction after an extraordinary run or something that requires a more fundamental reassessment.
The Iran war is the central complicating factor, and understanding why requires understanding how Rolls-Royce actually makes its money. The company is not a straightforward defence play. Its largest business by revenue is civil aerospace, which manufactures jet engines for wide-body commercial aircraft and generates much of its profit through long-term service agreements tied to engine flying hours.
When airlines fly less, or when oil prices make flying more expensive and compress passenger demand, Rolls-Royce collects fewer service fees. The Iran conflict, which has closed the Strait of Hormuz and sent Brent crude above $100 a barrel, is therefore a headwind for the civil business even while it creates a tailwind for the defence segment.
The defence unit, which produces military aero engines, naval engines and nuclear submarine power plants, generated £4.77 billion in revenue in 2025, up 8% year on year with operating margins ticking from 14.2% to 14.4%. European governments have been accelerating defence spending in response to geopolitical instability, and Rolls-Royce sits in a genuinely advantaged position given its deep integration into NATO platforms.
The power systems segment, which houses the MTU brand and covers engines for ships, data centres and land vehicles, also reported an 85% year-on-year increase in order intake. But neither of those positives is large enough to fully offset the civil aerospace exposure at current oil price levels.
The full-year 2025 results, published on February 26, were by most measures exceptional. Operating profit hit £3.46 billion on revenue of £20.06 billion, and free cash flow reached £3.3 billion, well ahead of where management had originally guided.
The company reinstated its dividend for the first time in more than five years, setting a total 2025 payout of 9.5p per share, representing 32% of underlying profit after tax. CEO Tufan Erginbilgic also announced the flagship capital return measure: a £7 billion to £9 billion multi-year share buyback running from 2026 through 2028, with £2.5 billion to be completed this year alone. That announcement drove shares to their all-time high immediately after the results day.
The £2.5 billion 2026 buyback, which officially commenced on April 1, is now doing active work in the market. Mechanically, a buyback programme of this size creates a persistent bid in the stock that analysts describe as creating a price floor. Erginbilgic himself retained 4,144 shares from his most recent incentive award, selling only enough to cover the resulting tax obligation.
CFO Helen McCabe did similarly, retaining 1,601 shares. Both decisions are widely interpreted as a signal that the company’s own leadership views the current price as representing a discount to intrinsic value rather than fair value.
The guidance for 2026 is £4.0 billion to £4.2 billion in underlying operating profit, up from £3.46 billion in 2025, with free cash flow projected at £3.6 billion to £3.8 billion. That trajectory, if achieved, would make Rolls-Royce one of the most profitable industrial companies in Britain by a significant margin. Medium-term targets for 2028 have been upgraded to £4.9 billion to £5.2 billion in operating profit and a free cash flow range of £5.0 billion to £5.3 billion. At those figures, the current price-to-earnings ratio, which sits around 30 times trailing earnings and is roughly double the FTSE 100 average, starts to look more defensible. Analysts have modelled the multiple converging toward 22 by 2028 as earnings grow into the valuation.
The near-term technical picture is more cautious. The Ichimoku Kijun line sits at 1,249p and is acting as immediate resistance, with MACD showing a sell reading and RSI at 49 signalling a mild downward bias. The stock opened with a gap down on Thursday and spent much of the session trading between 1,165p and 1,185p. Analysts at Traders Union flagged that “mixed indicators and persistent resistance limit conviction” at these levels, and cautioned that a sustained move below 1,150p could expose the shares to a test of long-term support around 1,135p, where the 200-day moving average sits.
UBS has a price target of 1,625p, which implies roughly 38% upside from current levels and reflects confidence in the civil aerospace recovery story playing out over a longer horizon. For investors with that kind of patience, the buyback programme and management’s own share retention suggest the case for holding remains intact. The risk is that the Iran conflict drags on long enough to meaningfully impair flying hours and civil revenue in the current financial year, putting pressure on the 2026 profit guidance before the market can look through it. With Brent still above $100 a barrel and Trump’s address this week signalling another two to three weeks of active military engagement at minimum, that scenario cannot yet be ruled out.
