Does Royal Dutch Shell Plc Pass My Triple Yield Test?

Finding affordable stocks is getting difficult in today’s buoyant market. Does Royal Dutch Shell Plc (LON:RDSB) fit the bill?

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.

royal dutch shell

Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE’s gains mean that the wider market is no longer cheap, and it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).

The triple yield test

Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my income portfolio, I like to look at three key trailing yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

Royal Dutch Shell Value
Current share price 2,264p
Dividend yield 4.9%
Earnings yield 8.4%
Free cash flow yield 0.2%
FTSE 100 average dividend yield 3.0%
FTSE 100 earnings yield 6.0%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. Shell’s earnings yield of 8.4% highlights the firm’s low valuation — it currently trades on a P/E multiple of less than 12 times 2013 earnings.

Shell’s 4.9% dividend yield is also attractive, but the firm’s spending has run out of control in recent years, a problem highlighted by last year’s free cash flow yield of just 0.2%.

This low figure is the result of Shell’s runaway spending in 2013: Shell generated operating cash flow of $40.4bn last year, but $40.1bn of this was swallowed up by capital expenditure commitments.

This left almost no free cash flow to fund the firm’s $5bn share buyback and $7.2bn of cash dividend payments — expenditure that was funded using new debt and Shell’s cash reserves, which fell from $18.6bn to $9.7bn last year.

Change starts at the top

Institutional investors have become increasingly unhappy with Shell’s spendthrift ways, and the firm’s new chief executive, Ben van Beurden, has indicated that things will change.

Since taking charge four weeks ago, Mr van Beurden has already announced disposals worth $2.1bn, and the firm said yesterday that it is planning up to $15bn of asset sales over the next two years, while also applying tougher criteria to new investment decisions.

I’m confident in Shell’s turnaround plans, and believe that like the big miners, Shell will find a way to cut costs and boost shareholder returns. Based on this, I rate Shell as a strong buy for 2014.

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.

> Roland owns shares in Royal Dutch Shell.

More on Investing Articles

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »

British Pennies on a Pound Note
Investing Articles

Up 900%, could penny share Kodal Minerals have further to run?

Over five years, this penny share has increased in value by a factor of 10. Could the latest news persuade…

Read more »

Investing Articles

3 world-class stocks to consider buying, while they’re ‘on sale’

Looking for stocks to buy? These three all have attractive long-term prospects and are currently trading 20% or more below…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could BP’s share price rebound over the next 12 months? These analysts think the answer is ‘yes’!

BPs share price has plummeted over the last year. But City brokers think things are about to turn around, as…

Read more »

Investing Articles

Is this an unmissable opportunity to buy Nvidia stock?

Nvidia stock is down 33% from its peak, driven by tariffs and geopolitical pressures. Despite this, some investors may spy…

Read more »