The shares of oil supermajor Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), currently trading at 2,590p, have surged 58% over the last five years, just ahead of the 52% gain of the FTSE 100.
I think Shell has the potential to deliver a repeat performance over the next five years.
Here’s how
Shell has made massive annual capital investment over the last five years; getting on for $50bn during 2013 alone. However, things are changing under new chief executive Ben van Beurden, who took over from big spender Peter Voser earlier this year.
The new boss is focusing on “enhanced capital efficiency, including more selectivity on project choices and $15bn of divestments in 2014-15”. Strengthening operational performance and project delivery are also on the agenda. All with the goal of delivering “through-cycle growth in cash flow, to drive competitive returns and a growing dividend”.
The market likes van Beurden’s tilting of the strategy a bit more towards shareholder returns, and while Shell is the biggest elephant of the FTSE 100, so is never going to gallop, City analysts see earnings progressing at a reasonable pace in the coming years.
The analysts are forecasting that Shell’s earnings per share (EPS) will increase at a compound annual growth rate (CAGR) of 6% from last year’s 188p to 253p by the year ending December 2018 — a total increase of 35%.
If the shares track earnings, and continue to rate on their current trailing price-to-earnings (P/E) ratio of 13.8, the price will of course rise by the same 35% as EPS, putting Shell’s shares at about 3,490p.
Shell’s shares have been re-rating under management’s new direction; indeed, they are currently trading at a 52-week high. The re-rating could well continue, taking the P/E up to the FTSE 100’s long-term historic average of 16 in due course. If so, we’d see the shares at 4,048p five years from now — a 56% rise from today’s 2,590p.
Investors would also bag five years of decent dividends. The trailing yield of 4.3% is above the FTSE 100’s 3.5%, although analysts see income growth being tempered by a five-year dividend CAGR of around 2.5% — below the EPS CAGR — as dividend cover improves from 1.7 to a more healthy 2.
We’d see a total of 596p a share of dividends paid out over the period. Put another way, a £1,000 investment in Shell today would deliver £230 of income.
