Although the short-term performance of shares is not a major consideration for longer-term investors who are focused on retirement, Shells (LSE: RDSB) performance in 2014 has nevertheless been hugely encouraging.
Thats because shares in the oil major have risen by an impressive 7.5% at a time when the wider market has disappointed (the FTSE 100 is down 1.5% over the same time period) and the oil price has been weak (falling to below $100 per barrel).
Looking ahead, Shell could be set to continue its strong performance and could be a great long-term play heres why.
A Changing Asset Base
With a new management team comes a new strategy. While in previous years the focus at Shell was on diversifying and attempting to deliver relatively consistent, reliable earnings growth, today it is on becoming more efficient, more nimble and more profitable.
Therefore, Shell is in the process of reducing the size of its asset base. It is selling off assets that it views as non-core and which offer little in the way of growth potential. Not only is this making the business smaller and more efficient, it is raising a significant amount of capital that can be put to use in further capital expenditure and investment in the core areas of the business to ensure that they are well-positioned to deliver strong growth in the long run.
One big plus for investors in Shell is the companys vast cash flow. This not only allows Shell to invest heavily in new plant and machinery, but also means that dividend growth and share buybacks are very generous. For example, Shell announced in July that it plans to spend around 18 billion over the next two years on share buybacks and increased dividends, which is clearly great news for income investors.
The effects of this commitment can be seen in the dividend per share growth that is forecast for next year. Shell is expected to increase dividends per share by 3.2% in 2015 and this means that shares in the company could be yielding as much as 4.8% next year (assuming a constant share price).
Clearly, a smaller asset base can mean more volatility moving forward. However, for long-term investors this will not be a major concern, since Shells earnings and dividends are moving in the right direction. With shares in the company trading on a price to earnings (P/E) ratio of just 10.5, they seem to offer a stunning combination of income potential, value and bright future prospects. As a result, they could help you to retire rich.
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Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.