Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce (LSE: RR) shares were at 812p just under one month ago. As I type (11 April), they’re priced at 676p, which means they’ve suffered a 17% haircut.

Zooming out further though, the FTSE 100 stock is up 350% over the past two years. So it’s still been a massive winner.

Is this dip large enough for me to consider buying more shares? Let’s find out.

Heightened risks

To answer this, I want to know the reason for the recent sell-off. As we know, this was tiggered by the Trump administration’s sweeping US tariffs, which hit nearly all stocks.

However, the Rolls-Royce share price fell more than most. Why? Well, it had already gone up a lot and was trading above 30 times forecast earnings. That was a rich valuation, and it’s normally high-value stocks that take a pounding when markets sell off aggressively.

Beyond that though, there are some worries here. Rolls-Royce relies on a complex international supply chain, sourcing components from various countries. That’s just become a minefield, as tariff uncertainty is likely to exacerbate the supply chain problems that were already present.

Also, a severe trade war between the US and China may yet cause a global recession, which would almost certainly impact international travel. Obviously that wouldn’t be ideal for airlines or engine makers.

Given this context, it doesn’t surprise me that the share price has experienced a significant pullback.

SMR progress

Even if the global economy entered a downturn though, at least there is Rolls-Royce’s defence division. This is poised to benefit from the huge military spending that Europe is ready to embark upon. It’s not inconceivable that this could be a multi-decade opportunity for the firm.

Beyond that, there are small modular reactors (SMRs). Each factory-built mini reactor is expected to generate enough low-carbon electricity to power 1m homes for 60+ years.

Rolls-Royce is a global leader in this technology and has been shortlisted with three other firms to deploy SMRs in the UK. Today we got news that Rolls-Royce SMR has submitted its final tender to Great British Nuclear after a six-month period of detailed negotiations.  

Rolls-Royce SMR has already been selected by utility ČEZ in the Czech Republic for up to 3GW of power, as well as being shortlisted in Sweden.

The company expects SMRs to be immediately cash-flow positive and generate a strong double-digit return on capital. They hold out the promise of decarbonising energy systems while meeting the world’s growing electricity demand, so it is a huge long-term opportunity.

My move

Based on current forecasts for 2025, the stock’s forward-looking price-to-earnings ratio is around 29. The forecast dividend yield is just 1.1% though.

I’d say the stock still looks a bit pricey, based on what we know. If supply chain issues worsen due to ongoing uncertainty relating to tariffs, then the share price could fall back a bit more.

I bought Rolls shares at 149p in 2023, then more at 477p last summer. I’m happy with the size of that position for now.

For those not invested, I think this dip might be worth considering. Personally though, I wouldn’t bet the farm when there is so much uncertainty in the global economy.

Things could be volatile all year long, presenting even better buying opportunities.

This post was originally published on Motley Fool