It’s been a prosperous year for investors in Shell (LSE: RDSB) (NYSE: RDS.B.US), with shares in the oil major having gained 11% year-to-date, while the FTSE 10o is currently flat over the same time period.
Indeed, sentiment in Shell has benefitted from a rising oil price, which helps to increase revenues for the company without having the same effect on costs.
And despite its recent share price rise, Shell still appears to have significant long-term potential and could help to make a positive contribution to paying off your mortgage.
Great Value
Despite showing strong gains thus far in 2014, shares in Shell continue to offer great value at current price levels. For instance, they trade on a price to earnings (P/E) ratio of 11.6, which is significantly lower than the FTSE 100’s P/E of 13.9 and shows that there continues to be potential for an upward revision in Shell’s rating.
A Mature Company
Certainly, Shell is no longer a high-growth stock. Its forecasts for next year provide evidence of this, with the company set to deliver just a 2% rise in earnings per share (EPS). Clearly, this is a slight disappointment, but on the flip-side Shell benefits from being a mature company operating in a mature industry. This affords it far greater stability than many of its sector peers and means that Shell’s cash flow is extremely strong.
In turn, this equates to a growing and well-covered dividend, which could prove to be a key attraction for many investors, as interest rates look set to remain low for some time. At the moment Shell yields 4.4%, with dividends covered two times by profit. Of course, this means that there is scope for the proportion of profit paid as a dividend to increase, since Shell appears able to afford to be more generous with regard to shareholder payments due to its relative stability and strong cash flow. This could mean a brisk rate of increase in dividends per share going forward.
A Reduced Volatility Play
With markets continuing to remain volatile, many long-term investors welcome shares that fluctuate less than the wider index. One way of measuring this is a company’s beta, which gives an indication of how much a share price should change given a 1% move in the wider index. With a beta of 0.8, Shell should (in theory) move 0.8% for every 1% change in the index, thus making it potentially less volatile than the FTSE 100.
Indeed, when it comes to paying off your mortgage, less volatile, more stable, higher yielding and better value companies, such as Shell, could make the biggest difference.
