Royal Dutch Shell Plc (LON: RDSB) has spent huge sums while profits have stagnated.
These days you don't have to look far to spot lowly rated shares within the FTSE 100.
With a market value of £138bn, Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is the largest constituent of the blue-chip index. Yet its £22 shares trade at about 8.7 times the underlying earnings declared last week for 2012.
A number of reasons could explain the single-digit rating. Possibilities include the group's prospects for additional production, potential price swings within energy markets and the fact that earnings last year were less than that recorded during 2007.
Another reason could be Shell's capital expenditure. The company spends vast amounts every year on plant, property and equipment, and the sums are well in excess of the associated depreciation and amortisation charged against reported earnings.
Here are the figures, courtesy of S&P Capital IQ:
|Depreciation and amortisation||12,563||13,082||12,654||12,735||11,714||14,615|
|Net capital expenditure||16,010||30,328||25,191||23,615||19,311||26,230|
You could argue Shell's report earnings are somewhat flattered by its depreciation policy.
In fact, I calculate net capital expenditure during the last six years has exceeded the reported depreciation charge by between 27% and 132%, and by an average of around 80%.
Indeed, more than $140bn has been spent on plant, property on equipment between 2007 and 2012, of which more than $60bn was not charged to the profit and loss account.
Of course, Shell's capital expenditure goes towards various long-term projects, so I accept the associated accounting costs are spread across the lifetime of the projects and are not expensed immediately.
But when you consider Shell's earnings were $5 per share during 2007 and were $4 a share last year, you do have to wonder about the benefits of that aforementioned $140bn of expenditure.
Bear in mind, too, that Shell has indicated net capital expenditure will top $30bn during each of 2013, 2014 and 2015. At some point, all this expenditure will have to propel the group's earnings higher.
Anyway, I'm a bit sceptical of Shell's reported earnings, and so it seems is the market, which is why I believe you can buy Shell's shares for less than 9 times the firm's accounting profits.
Still, those profits are funding an 114p per share dividend for 2013, which in turn supports a 5.2% yield. Not bad -- especially when the payout has just been lifted by nearly 5%.
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> Maynard does not own any share mentioned in this article.