A good buying opportunity

Shares in Royal Dutch Shell (LSE: RDSB) have fallen by 9% over the last month, despite the rising price of oil. This decline means that Shell shares are once again offering a forecast dividend yield of more than 7%.

In my view, this is likely to be a good buying opportunity. If Shell can maintain its dividend payout as expected for the next two years, I think this high yield is likely to fall. That would mean a corresponding increase in the share price.

Shell’s earnings are expected to rise by 85% to $2.02 per share in 2017. This puts the stock on a forecast P/E of 12.2. It would also be enough to cover the expected dividend of $1.83 per share.

The rising price of oil could also give Shell a helping hand. After a year of cuts, broker forecasts for Shell’s 2016 and 2017 earnings have risen modestly over the last month. If the price of oil stabilises or rises further, this process could continue. According to the company, the recent takeover of BG Group is likely to deliver bigger cost savings more quickly than expected.

Shell’s tight control on spending and the group’s planned asset sales should also help. In 2016, total capital expenditure for Shell and BG combined is expected to be $30bn. That’s 9% less than the $33bn spent by Shell alone in 2015.

In my view, Shell’s share price could easily rise by 20% over the next 18-24 months. This would cut the stock’s yield to a more normal 6.3% and reflect the likely rise in profits as the oil market starts to recover. Shell remains a solid income buy, in my opinion.

Is more disappointment in store?

At Barclays (LSE: BARC), the situation is slightly different. I believe the reason for the shares’ poor performance is that the bank keeps on disappointing investors. The dividend has been cut and profits are recovering much more slowly than expected.

I think this is why Barclays’ shares currently trade on such a weak valuation. The bank’s stock is currently worth 38% less than its net tangible asset value. The shares trade on just 7.9 times 2017 forecast earnings.

In my view this modest valuation could easily trigger a 20% surge higher, if Barclays can finally manage to hit its targets. The problem is that that is a big risk. Banks are still in the process of unwinding the huge portfolios of underperforming assets which are the legacy of the pre-2008 credit boom.

No one knows how long this will take. As a Barclays shareholder, I hope the bank will start to deliver concrete results soon. I believe chief executive Jes Staley is moving in the right direction, but the reality is that the end result is uncertain.

Forecast earnings for this year have been cut by 45% since January. Profit growth expected in 2016 has now been pushed back into 2017. Although a 20% rise would only take Barclays’ share price back to about 210p — a price last seen at the start of this year — an improvement in market sentiment will be required to make this happen. Patience may be needed.

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Roland Head owns shares of Barclays and Royal Dutch Shell. The Motley Fool UK has recommended Barclays and Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.