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Should I Buy Royal Dutch Shell Plc?

I’m looking to fill up my portfolio with some great value FTSE 100 stocks. Is now a good time to top up my holdings in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US)? 

Shell-shocked

I thought I could be sure of Royal Dutch Shell when I bought it three years ago. It looked undervalued and I expected it to start motoring again soon. I can’t really complain about its subsequent performance — it is up 26% since then, roughly in line with the FTSE 100 over that time. But frankly, I had expected it to have a little more poke.  

Shell’s share price has gone into reverse lately, falling 7% in the last 12 months, while the FTSE rose nearly 13%. That leaves it trading at just 7.8 times earnings, which looks like bargain territory. Then again, it looked a bargain when I last looked at it in October last year, and it is actually cheaper today. Is it set to turn a corner?

The power of five

The Anglo-Dutch oil giant’s Q2 results were a major disappointment, with underlying earnings down 21% to $4.6bn, compared to Q2 last year. The share price fell nearly 5% on the day. Chief executive Peter Voser didn’t even try to gloss over the bad news: “Higher costs, exploration charges, adverse currency exchange rate effects and challenges in Nigeria have hit our bottom line. These results were undermined by a number of factors – but they were clearly disappointing for Shell.”

Oil theft and disruption to supplies in Nigeria didn’t help, while environmental problems threaten reputational damage. Nor does an overhanging European Commission probe into Shell’s pricing practices.

On the positive side, Voser claimed that “Shell is rich with new investment opportunities”. It is investing heavily in new capacity, including five major projects start-ups which should add more than $4bn to its 2015 cash flow. It is also prioritising financial performance over cash flow, and has completed $21bn of divestments in the last three years, with more to come. It is on track for a twin $4bn and $5bn worth of share buybacks in 2013.

Best of all, Shell announced a 5% increase in its Q2 dividend. Right now, it yields 5.1%, putting it among the top five FTSE 100 dividend payers.

Black juice

If I’ve learned one thing about investing in recent years, it is the value of patience. Selling Shell now would be crazy. Its time will come. Shell’s investment programme and its recent oil discovery in the Gulf of Mexico should help boost its reserves, and I’m encouraged by management’s aim to boost output from 3.3 million barrels of all equivalent per day this year, to 4 million in 2017.

Forecast earnings per share (EPS) growth is negative this year at -8%, but should rise 5% in 2014. If you’re investing for the long term, that juicy 5.1% dividend will keep your portfolio ticking over until the share price starts purring again.

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> Harvey owns shares in Royal Dutch Shell.