You can pay a price for quality, but in the case of Royal Dutch Shell (LSE: RDSB) (LSE: RDSA) (NYSE: RDS-B.US), I think it may be worthwhile. While peer BP faces years of costly legal battles in the US, plus a potential $18bn fine, Shell does not.
Similarly, although Shell does have activities in Russia, they are mostly geared to gas production, and seem less likely to be affected by western sanctions than Russian oil producer Rosneft, in which BP has a 20% stake.
Against this backdrop, its no surprise that Shell offers a prospective yield of just 4.7%, while BP offers around 5.4%.
However, Shell is hardly a growth stock, and its shares have gained a FTSE 100-beating 12% so far this year so is the FTSEs largest member still a buy?
Valuation
Lets start with the basics: how is Shell valued against its past performance, and the markets expectations of future performance?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
12.4 |
|
2-year average forecast P/E |
11.0 |
Source: Company reports, consensus forecasts
Shells forecast P/E of 11 doesnt seem unreasonable, given the firms renewed focus on profit growth and shareholder returns, plus its decent yield.
To put Shells valuation into context, embattled BP currently trades on a two-year forecast P/E of 9.0, while the FTSE 100 has a P/E of just under 14.
What about the fundamentals?
Of course, its unwise to invest based on valuation alone we also need to take a look at Shells fundamental performance, too:
|
5-year compound average growth rate |
Value |
|
Sales |
10.2% |
|
Net profits (post tax) |
5.4% |
|
Dividend |
1.4% |
|
Book value |
6.9% |
Source: Company reports
Its worth noting that Shells apparent 10.2% average annual sales growth is flattered by the oil price crash that took place in 2009. Shells revenues are expected to be around $448bn this year lower than any year since 2011, and lower than in 2008.
The growth rate of Shells profits has also been boosted by the rapid recovery of the oil price after the 2009 crash. Indeed, the Shells true growth rate over the last five years is probably best indicated by its dividend growth history not a lot.
Things are changing
However, things are looking up for Shell shareholders. The firm has a newish chief executive, Ben van Beurden, who has proved himself willing to say no to projects that may not provide decent returns, and to selectively sell assets, in order to trim Shells bloated portfolio and raise cash.
Shells dividend payout is expected to rise by nearly 5% this year, and by 6% next year, and I rate the shares as an attractive buy for long-term income.
However, the firm’s strong share price performance over the last year suggests to me that further gains may be unlikely in the near term.
I reckon that investors looking for more immediate profit opportunities should probably look elsewhere, at firms such as those highlighted in “Where We Think The Smart Money Is Headed“.
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Roland Headowns shares in 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.
