Can Royal Dutch Shell Plc's (LON: RDSB) total return beat the wider market?
To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), which describes itself as a global group of energy and petrochemicals companies. People often refer to the firm as an oil major.
With the shares at 2153p, Shell's market cap. is £56,425 million.
This table summarises the firm's recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|
| Revenue ($m) | 458,361 | 278,188 | 368,056 | 470,171 | 467,153 |
| Net cash from operations ($m) | 43,918 | 21,488 | 27,350 | 36,771 | 46,140 |
| Adjusted earnings per share | 509 | 160 | 304 | 461 | 432 |
| Dividend per share | 160 | 168 | 168 | 168 | 172 |
Looking at the figures, I reckon Shell is showing the cyclical nature of its business. Most indicators have been growing since their lows in the table, but over the whole period, performance has been broadly flat.
Nevertheless, Shell has a growth agenda and is expecting around 30 major projects, currently at various stages of completion, to advance financial and production growth by adding about seven billion barrels of oil, or gas equivalents. The company thinks that upstream activity could add some $15 billion of cash flow by 2015, if the oil price holds at about $100 per barrel.
A scoot around Shell's website reveals that, at the end of 2012, the firm had 12.4 billion barrels of oil equivalent (BBOE) of resources on stream, averaging 3.4 million barrels of oil equivalent per day (MBOE/D) of production. It expects that production figure to rise to about four MBOE/D by 2017/18, thanks to around 20 BBOE of resources potential in its development funnel, which the company reckons averages out to about 26 years worth of current production.
However, I think the total-return potential for investors is uncertain as much could depend on the vagaries of oil and gas prices and general macro-economic conditions.
Royal Dutch Shell's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
1. Dividend cover: adjusted earnings covered the last dividend two-and-a-half times. 4/5
2. Borrowings: net gearing is around 10% with net borrowings about 40% of earnings. 4/5
3. Growth: all of revenue, earnings and cash flow have been growing from a cyclical low. 3/5
4. Price to earnings: a forward eight looks fair compared to growth and yield forecasts. 2/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 3/5
Overall, I score Shell 16 out of 25, which inclines me to be cautious about the firm's potential to out-pace the wider market's total return, going forward.
Foolish Summary
Earnings cover the dividend quite well and borrowing seems under control. There is an element of cyclicality in the figures and forecasts for growth, recent trading and a mild outlook statement, all lack the conviction to reassure me sufficiently about the firm's prospects. I'm not going to invest in Royal Dutch Shell right now.
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> Kevin does not own shares in Royal Dutch Shell.
