Rolls-Royce raises 2026 and 2028 projections with strong aerospace and defense demand

Rolls-Royce Holdings plc reported strong results for the 2025 financial year and provided updated guidance for 2026, as well as revised targets for 2028. The company reported underlying operating profit of around £3.5 billion, with a margin of 17.3%, and free cash flow of £3.3 billion. Esses figures reflect growth in the civil aviation and defense divisions, driven by increased activity in after-sales services and new engine orders. The net cash position reached £1.9 billion at the end of 2025, demonstrating consistent recovery after previous challenging periods.

Investors note that the company maintains a resilient business model, with long-term contracts that guarantee recurring revenue. The civil aerospace division posted an operating margin of 20.5%, supported by improved performance in large engine services and contractual optimizations. Já the defense area recorded a margin of 14.4%, with sustained demand for international contracts. The company also highlighted growth in power systems, especially for data centers and government applications.

Robust demand in civil aviation supports multi-year growth

The order book for large engines in the civil division grew significantly in 2025, with 638 units ordered, which represents an increase of 29.1% compared to the previous year. Essa expansion led to an order-to-gross turnover ratio of 2.5 times, compared to 1.8 times in 2024. Long-term service contracts (LTSA) reached £973 million, up 1.8% and higher margins.

The civil aerospace sector faces one-off jet fuel supply constraints in some markets, but overall passenger traffic trends remain positive. The Associação Internacional of Transporte Aéreo (IATA) indicates that the global aircraft backlog exceeds 17 thousand units, while the annual delivery capacity is around 1,226 thousand aircraft. Essa discrepancy suggests that demand for engines should remain high in the coming years.

The administration reinforces that the long-term outlook for commercial travel is favorable, even with temporary interruptions linked to geopolitical events. The company plans to release a commercial update for the first quarter of 2026 in May, which will allow greater visibility into the flight hours of large engines.

Defense sector gains boost from rising global spending

Rolls-Royce’s defense division closed 2025 with a backlog of £17.4 billion, equivalent to more than three years of revenue. The company has captured significant contracts, including deals worth more than £1.5 billion with Ministério of Defesa of Reino Unido and Departamento of Defesa of Estados Unidos for EJ200 and AE 2100 engines. Esses orders cover transport and combat aircraft.

New international commitments, such as the export of 20 aircraft Eurofighter Typhoon to Turquia and additional orders for Itália, Alemanha and Espanha, provide production visibility into the 2030s. The company has also placed orders for more than 300 engines Leopard 2 in the government segment, reinforcing its presence in land vehicles.

Rising defense spending in several countries, driven by geopolitical tensions, creates additional opportunities for aftermarket contracts and fleet modernization. Rolls-Royce highlights that the adoption of more modern engines in programs such as Global Combat Air Programme (GCAP) should generate stable revenue in the long term.

Guidance for 2026 and revised targets for 2028 indicate acceleration

For the 2026 financial year, the company projects underlying operating profit of between £4.0 billion and £4.2 billion, with free cash flow of between £3.6 billion and £3.8 billion. Essas estimates consider the superior performance achieved in 2025 and the continued growth in aftermarket services. The guidance incorporates specific challenges in the supply chain, which are expected to diminish over time.

Medium-term targets for 2028 were raised to underlying operating profit of between £4.9 billion and £5.2 billion, with an operating margin of between 18% and 20%. Projected free cash flow is between £5.0 billion and £5.3 billion. Essa review reflects better-than-expected performance in 2025 and expansion of contractual margins.

The company also announced a multi-year share buyback program worth £7 billion to £9 billion for the period 2026 to 2028, after completing a £1 billion buyback in 2025. The plan demonstrates management’s confidence in future cash flow and aims to generate value for shareholders.

Assessments and technical indicators point to an attractive opportunity

Rolls-Royce maintains a projected price/earnings ratio at reasonable levels when compared to the company’s recent history. The expected growth in adjusted earnings per share supports the thesis that the stock offers upside potential, especially following recent market corrections. The positive net cash position reinforces financial strength.

Technical indicators show that shares have recovered from oversold levels seen in March 2026, remaining close to the uptrend established since 2022. Trading volume and oscillators like the RSI indicate conditions that attract investors looking to enter assets with solid fundamentals.

Management has committed to distributing more than 75% of the free cash flow generated between 2026 and 2028 through dividends and share repurchases. In 2025, dividend payout represented 32% of net profit after taxes, an increase of 58.3% compared to the previous year.

Service strategy and operational efficiency drives margins

Rolls-Royce continues to expand the “Power by the Hour” model, in which customers pay by the hour they use the engines. Essa approach reduces revenue volatility and increases the predictability of cash flows. After-sales services represent a growing portion of total revenue, with margins higher than those for original equipment.

Simplification and internal efficiency programs contributed to the expansion of margins in all divisions. In civil aviation, the focus on contractual optimization and profitability of spare engines generated relevant gains. In defense, growth in mature engine maintenance contracts complements new orders.

The company closely monitors variables such as jet fuel prices and component availability, adjusting operations as necessary. Apesar short-term swings, multi-year demand trends in commercial aviation and defense remain constructive.

Rolls-Royce should continue to benefit from the combination of air traffic recovery and increased military budgets in several markets. The robust order book and the strengthening of the balance sheet position the company to deliver consistent results in the coming years.