It’s been a strong first six months of the year for Shell (LSE: RDSB) (NYSE: RDS.B.US), with the oil major posting gains of over 11% since the turn of the year while the FTSE 100 is up less than 1% over the same time period. This is perhaps surprising, given that Shell has suffered from negative sentiment in recent years as the company has struggled to deliver on exploration expectations.
Of course, always considered to be a strong income play, does the impressive showing of Shell in 2014 mean that it should now be viewed as an attractive growth stock, too? Or, does Shell still fail to be classed as a super growth stock?
A Disappointing Growth Rate
Although Shell’s share price has posted gains in 2014 that are reminiscent of a growth stock, its earnings per share (EPS) are forecast to grow by just 1% in 2015. This is well-below the FTSE 100 average of mid-single digits and could be so low because of Shell’s size. As mentioned, exploration performance has generally disappointed in recent years, as Shell loses out in many cases to its smaller, more nimble rivals that are able to more easily exploit difficult to reach and speculative exploration sites.
An Increasing Oil Price
A key reason for Shell’s strong share price showing in recent months has been a rising oil price. Put simply, a rising oil price is great news for oil producers such as Shell because it does not alter costs and yet increases revenues substantially. Therefore, continued unrest in the Middle East could cause the oil price to make higher highs, which could increase revenues for Shell.
A Great Yield
Despite lacking growth potential, shares in Shell remain attractive due to their yield of 4.4%. This is almost three times the current rate of inflation, more than double the best savings rates on offer and, perhaps most importantly, well-ahead of the FTSE 100’s current yield of 3.4%.
Furthermore, Shell is forecast to increase dividends per share at an inflation-beating pace. Dividends per share next year are set to be 2.5% higher than in the current year, which equates to a real gain (i.e. after inflation is deducted) of 1%.
Looking Ahead
Although Shell has lost ground to competitors regarding exploration in recent years, the company offers investors a far more reliable income stream and more attractive valuation than many of its peers. For instance, Shell currently trades on a price to earnings (P/E) ratio of just 11.6, which highlights just how attractively priced shares are at present compared to the FTSE 100, which has a P/E of 14.2.
Indeed, although Shell looks set to struggle with bottom-line growth in 2015, the company still looks good value, although it is still a long way from being a super growth stock.
