The jet engine maker smashed full-year expectations and launched a £7-9bn buyback programme. Wall Street liked it. Some on the buyside wanted more
Rolls-Royce Holdings PLC (LSE:RR.) delivered its strongest set of annual results in years on Thursday, beating profit and cash flow forecasts and sharply upgrading its medium-term financial targets.
The shares rose 5% to around 1,377p, extending a run that has seen the stock gain 119% over the past 12 months.
Yet for a cohort of investors who had pencilled in even bigger numbers for 2028, the morning's figures carried at least a trace of disappointment.
The company reported full-year 2025 adjusted operating profit of £3.46 billion, roughly 6% above consensus expectations, and free cash flow of £3.27 billion, around 3% ahead. Those are meaningful beats by any standard.
The second half alone produced a 16% operating profit surprise against analyst forecasts, driven in large part by an exceptional quarter from the Power Systems division.
Data centre demand powers an unexpected standout
The division most associated with Rolls-Royce's heritage in large civil aero engines was not, in fact, the story of the morning. Power Systems was. The unit, which supplies high-speed diesel engines and power generation equipment for marine, industrial and energy applications, delivered second-half operating profit of £539 million, roughly 31% ahead of consensus and 45% higher than the same period a year earlier. Its margin reached 18.9% in the second half against expectations closer to 15%.
The driver, analysts at UBS noted, was profitable growth in data centre power generation, a market that has accelerated sharply as hyperscalers race to build out artificial intelligence infrastructure. Rolls-Royce had already flagged a 20% revenue growth target for this segment at its half-year results; Thursday's performance suggested the opportunity is tracking ahead even of those elevated expectations.
The 2028 margin guidance for Power Systems has now been lifted to 18-20%, up from a prior range of 14-16%. On the Jefferies numbers, the market had been modelling closer to 20%, suggesting the new guidance range is still cautious, but the direction of travel is unambiguous.
Civil aerospace catches up, slowly
Rolls-Royce's largest division by revenue, civil aerospace, posted a more nuanced outcome. Operating profit in the second half came in at £937 million, around 7% ahead of consensus, though analysts at Jefferies noted the division fell short of their own more bullish expectations. The miss relative to Jefferies was partly explained by £62 million of negative contractual catch-ups in the period.
Strip those out, and the picture improves considerably. Civil margins excluding catch-up adjustments reached 18.8% for the full year, representing around 500 basis points of improvement year on year. It is a striking rate of progress and underlines how much margin recovery remains ahead under the long-term service agreement contracts that govern the business.
Large engine flying hours, the key volume metric for civil aftermarket revenues, reached 111% of 2019 levels by year's end, slightly ahead of consensus. Engine deliveries, however, disappointed. Rolls-Royce handed over 483 original equipment engines in 2025, below the company's own guidance for the low end of a 540-570 range. Analysts flagged this as broadly neutral to margins, since fewer new-build deliveries can actually be a tailwind to profits, given the economics of long-term service contracts.
For 2028, civil margins are now guided at 21-23%, unchanged from analyst consensus expectations and in line with UBS's estimate of 22.5%.
Buyback programme lands above expectations
One element of Thursday's release attracted broad agreement: the capital return programme was larger than the market had anticipated. Rolls-Royce announced a £2.5 billion buyback for 2026, part of a £7-9 billion total programme over the 2026-2028 period. That figure includes the £200m already completed.
Press speculation in the days before the results had pointed to a smaller number, so the announcement carried a positive surprise. For a company that was burning through cash and struggling with a deeply negative net asset position as recently as 2022, committing to nearly £9 billion of buybacks over three years represents a transformation in financial credibility.
The 2028 question
Where investors found less comfort was in the headline 2028 free cash flow guidance. Rolls-Royce set a target of £5.0-5.3 billion, against a prior range of £4.2-4.5 billion. On most measures, that is a substantial upgrade, and it sits 8% above consensus estimates at the Jefferies measure. But the buy-side had apparently been modelling around £5.4bn, a figure that had become something of a whisper number in advance of results.
UBS analysts, who maintain a Buy rating with a 1,625p price target, described the likely investor reaction as neutral to slightly negative, noting that some investors may make allowance for what they perceive as a conservative guidance stance from management. The 2028 operating profit range of £4.9-5.2 billion represents a 35% increase on the prior midpoint, but the upper end of the free cash flow range still sits below buy-side expectations.
Jefferies, also Buy-rated with a 1,550p target, was more straightforwardly positive, highlighting the quality of the 2025 cash flow performance. The full-year FCF included only £0.6 billion of net growth in the long-term service agreement creditor balance against prior guidance for the lower end of a £0.8-1.2 billion range. That means the cash performance relied less on balance sheet mechanics and more on underlying earnings conversion, which analysts regard as a mark of quality.
Defence adds a new growth story
Thursday's update also sharpened the growth outlook for defence. Rolls-Royce now expects its government business to grow at a 20% compound annual growth rate over the medium term, up from a prior assumption of 12-14%. The revision reflects rising defence budgets across NATO nations following Russia's invasion of Ukraine and the broader rearmament underway across Europe. Defence operating margins were guided at 14-16% for 2028, unchanged from prior targets.
Combined with the data centre opportunity in Power Systems and ongoing civil aftermarket recovery, the defence upgrade means Rolls-Royce now has three credible growth engines operating simultaneously, a position that was difficult to envisage even two years ago.
What to watch
The company is hosting a results call on Thursday, where management commentary on civil margin progression beyond 2028, the sustainability of data centre demand and the cadence of the buyback will likely set the tone for the remainder of the trading session.
With both UBS and Jefferies maintaining 'buy' ratings and price targets of 1,550-1,625p, the consensus view among analysts covering the stock is that Thursday's results, for all the debate around 2028 guidance, represent another step forward in one of British industry's most dramatic corporate recoveries.