Sometimes the market presents an opportunity thats too hard to pass up.And amidst the recent market chaos,two once-in-a-lifetime opportunities have emerged in the form of Royal Dutch Shell (LSE: RDSB)and GlaxoSmithKline (LSE: GSK).
Market sentiment couldnt be more negative for these two companies. For example, over the past sixmonths,Shell and Glaxos shares have slumped 22.3% and 13.1%respectively. Shellsshares printed a new five-year low at the end of August.
However, based on historic data, current trends and management predictions, these declines look to be overdone.
Oil issues
Shells shares have fallen in line with the price of oil, and many of the companys peers have also seen their shares slump to five-year lows during the past few weeks.
But these declines could present an opportunity for investors. Indeed, Shell is still profitable, has a rock-solid balance sheet and is slashing costs to improve margins. Whats more, Shell remains one of Europes largest refiners, and one of the worlds largest oil traders. First-halfrefining and marketing profits jumped93% year-on-year to $5.6bn.
Still, many investors are concernedabout the state of Shells dividend. The companys cash flow from operating activities slumped 42% to $13.2bn during the first half of the year, barely covering capital spending of $12.4bn. As a result, Shells dividend bill of $5.2bn in the first-halfwas paid with debt.
Nevertheless, while the figures may suggest that Shell will have to cut its dividend payout,the company has the capacity to maintain its payout at present levels in the short term as earnings fall. Shells net gearing is 14.3%, and the company is selling off some assets to boostitscredit profile. Also, capital spending is set to fall during the next few years as the company adjusts to the oil price environment.
So overall, Shells lofty dividend yield of 7.5% looks to be safe for the time being.
Out of favour
It seems as ifGlaxohas become the FTSE 100s most disliked company.Since the end of April, the companys shares have lost a fifth of their value as the City has expressed concern about the sustainability of the groups dividend payout.
But the Citys negative views runcontraryto the projections put out by Glaxos own management.
Glaxos management has stated that the companys dividend payout will be maintained at 80p per share for the next few years. While Im always sceptical about management forecasts, Im inclined to believe that this will be the case. Glaxos management has a reputation to uphold, and theres nothing more damaging to a reputation than going back on a commitment tomaintaininga dividend.
While City projections estimate that Glaxos dividend payout wont be covered by earnings per share this year, figures suggest the payoutwill be covered by earnings next year.
Moreover, based on the number of new treatments Glaxo currently has under various stages of development, management believes that the group can steadily grow earnings by themid-to-high single digits from 2016 to the end of the decade, further improving dividend cover.
Further research
Investing isn’t an exact science, and while the evidence may suggest that Shell and Glaxo are great long-term income investments, you shouldn’t take my word for it. As always,I strongly recommend that you do your own research before making a trading decision — you may come to a different conclusion.
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Rupert Hargreaves owns shares of GlaxoSmithKline and Royal Dutch Shell B. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
