These Companies Are Too Cheap: Royal Dutch Shell Plc, Barclays PLC and Rio Tinto plc

Royal Dutch Shell Plc (LON:RDSB), Barclays PLC (LON:BARC) and Rio Tinto plc (LON:RIO) are in bargain territory.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I suggested an investment yielding 12% in the current low-return environment, you’d think it was dodgy.  But that’s what’s on offer from the handful of companies in the FTSE 100 trading on prospective price-to-earnings (P/E) ratios below 9, a 25% discount to the market average.

If the P/E is 9 then the earnings yield — EPS divided by the share price — is 11%. True, it’s not all paid out in cash but what you don’t get in dividends is reinvested in the company (or possibly used to buy back shares). Either way, your wealth should increase.

Among those cheap companies are three quality stocks: Shell (LSE: RDSB) (NYSE: RDS-B.US), Barclays (LSE: BARC) (NYSE: BCS.US) and Rio Tinto (LSE: RIO).

Shell

Shell is trading on a forward P/E of 7.9, and there’s a juicy yield of 5.4%, too. Why so cheap? Exxon and Chevron are on P/Es of around 11 and 10 respectively, and even BP — with the Deepwater Horizon liabilities still hanging over it — is on 8.5.

One reason may be its big bet on US shale gas, with the glut of supply making that look less economic now than was hoped for. But the big challenge facing all oil majors is replenishing their resources and, to my mind, a strong position in shale gas is a positive, even if it takes some years to work out. Oil majors plan investment over decades, and Shell’s US shale gas position should ultimately prove a great boost to reserves.

Barclays

It’s easier to understand why Barclays has a low rating, with a P/E of 8.1. UK banks have been battered by dire economic conditions and self-inflicted pain. Under new management, Barclays is in the midst of a turnaround plan intended to restore its reputation and financials by 2015.

That programme looks on track, with the bank confident of meeting the latest, harshest, and hopefully final re-calibration of capital requirements imposed by the Prudential Regulatory Authority. The shares are trading at just 0.7 times net asset value, a discount surely not justified by the quality of its assets. The bank has held on to a good position in investment banking and is investing in Africa for another dimension of growth. There are still risks in banks and the yield is just 2.6%, but it looks cheap.

Rio Tinto

Rio Tinto makes most of its money from iron ore, so softening Chinese growth and the end of the mining super-cycle have hammered its shares, which are on a prospective P/E of just 7.5. Like most of the sector, the new CEO is cutting costs and investment to eke out shareholder value, so mining investors are seeing better dividend yields than they have for a long time (4.5% for Rio). 

Rio is one of the lowest-cost operators and its mines are mostly in stable regions: quality assets currently on offer at a bargain price.

Grabbing a bargain is always satisfying, but when it comes to shares it can make you seriously rich. There are tips aplenty about how to grow your portfolio in ‘Ten Steps to Making a Million in the Market’, a special Motley Fool report. You can download it to your inbox by clicking here — it’s free.

> Tony owns shares in Shell and Rio but no other shares mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

3 top FTSE 100 value shares I’d buy before August!

These FTSE 100 heavyweight shares have considerable long-term potential. And at current prices, I think they are too cheap to…

Read more »

Investing Articles

Here’s why I’m selling my Lloyds shares to double down on this FTSE 100 stock

Our writer digs into why he prefers HSBC over Lloyds shares right now, despite both performing really strongly in recent…

Read more »

Investing Articles

I’d invest £12,500 in this 1 stock to bag £1K of passive income!

Building a passive income stream through dividends is one of this writer’s biggest ambitions. Here’s how one stock could help.

Read more »

Investing Articles

3 cheap stocks to consider buying for the AI revolution

Investors looking for AI stocks to buy might be worried about high valuations amid current market euphoria, but these three…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Earnings up 20%! But this UK small-cap stock may just be getting started

Are we about to see enduring growth from this UK small-cap business with a rising stock price ahead over the…

Read more »

Investing Articles

1 FTSE 250 stock I’d give a wide berth… for now

One of the worst performers on the FTSE 250 index is a stock that Sumayya Mansoor has decided she won’t…

Read more »

Investing Articles

The FTSE 250 is brimming with potential, especially in stocks like this one

The main Footsie index gets all the attention but its little brother, the FTSE 250, is full of growth potential.…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

What on earth happened to the Premier African Minerals (LSE:PREM) share price?

The Premier African Minerals (LSE:PREM) share price is down a whopping 85% in the last year, so what happened? Gordon…

Read more »