Should you buy Royal Dutch Shell (LSE: RDSB) today?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) to determine whether you should consider buying the shares at 2,150p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
|Royal Dutch Shell||2,150p||180%||7.5||1.56||5.4%||0%||2.5|
The consensus analyst estimate for next year's earnings per share is 277p (5 % growth) and dividend per share is 112p (2.4% growth).
Trading on a projected P/E of 7.5, Shell looks slightly cheaper than its peers in the Oil & Gas Producers sector, who are currently trading on an average P/E of 8.9. Shell's low P/E and low single-digit growth rate gives a PEG ratio of 1.56, which implies the share is slightly overpriced for the earnings growth the firm is expected to produce.
Supporting a 5.4% yield, the dividend is above average for the Oil & Gas Producers sector, which currently offers a 4% average yield. However, Shell's dividend did not increase during 2009, 2010 and 2011.
Nonetheless, the dividend is two-and-a-half times covered, giving Shell room for payout growth. Shell paid a total of £6.7bn in dividends to shareholders during 2011, more than any other company in the FTSE 100.
I should also point out that Shell's five-year earnings growth is 5%, which includes an extremely poor 2009.
Shell looks cheap. What about growth?
With a low P/E compared to the rest of the sector and a large, well-covered dividend yield, Shell in my opinion looks cheap.
However, Shell's growth is slowing. I think Shell's slowing expansion is partly down to the company's product mix. Shell generates more than 90% of its revenues from refining, which has a significantly lower profit margin than the production of oil itself. Indeed, the average refiner's margin for 2011 was only $6 per barrel of oil, compared to the production of oil, which had a margin closer to $70 per barrel.
That said, with less than 10% of revenues coming from actual oil production, Shell's revenues are, to some extent, immune from oil-price fluctuations. As such, I believe the company should be able to maintain a more predictable cash flow. Indeed, Shell has not cut its dividend since the Second World War!
Right now, I believe Shell looks attractive for its dividend yield and low valuation. However, the PEG ratio does highlight slowing growth. So overall, I reckon now looks to be a good time to buy Royal Dutch Shell at 2,150p.
More FTSE opportunities
As well as Royal Dutch Shell, I am also positive on the blue chips highlighted in "The Market's Top Sectors". This special report sees three Motley Fool Share Advisor analysts each studying a favourable industry -- and spotlighting a particular share to consider for this year and beyond.
Various opportunities are covered in the report. One might provide "solid returns and... nice dividends", another could offer "global diversification and long-term growth potential", while a third looks a "high-quality business" from a battered sector.
You can read "The Market's Top Sectors" today by requesting the report for free. But hurry, the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Rupert does not own any share mentioned in this article.