Why Royal Dutch Shell Plc Has Never Looked More Attractive

With earnings down and earning potential up, Royal Dutch Shell Plc (LON: RDSB) looks good for the long haul.

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“Never sell Shell,” our investing forefathers used to chant, and we can see why: “Never sell British Petroleum,” just doesn’t have the same ring to it!

Income, dear boy, income!

Joking aside, a long-term bet on Royal Dutch Shell (LSE: RDSB) will have worked out okay for most investors.

Granted, capital appreciation has been in short supply in recent years with the share price not really doing much, but the crowning glory of an investment in Shell is the consistency of its dividend payout — the firm hasn’t missed a beat on dividends, either maintaining the payout or raising it, since 1945.

The recent record looks like this:

Year to December

2010

2011

2012

2013

2014

Net cash from operations ($m)

27,350

36,771

46,140

40,440

45,044

Dividend per share (cents)

168

168

172

180

188

That gargantuan cash-generation from operations keeps bulldozing forward, leaving plenty of spare change thrown aside for dividend payouts.

At today’s share price of 2132p, Shell is yielding 5.9% based on this year’s payout, which is covered around once by anticipated earnings. Those earnings look set to come in down this year with recovery during 2016.

The future looks bright

In one neat move, Shell has done much to secure its own future thanks to its proposed offer for BG Group (LSE: BG). The Boards of Shell and BG announced earlier this month that they reached agreement on the terms of a recommended cash and share offer by Shell for the entire issued and to be issued share capital of BG.

Shell expects the deal to accelerate its growth strategy in global LNG and deep-water operations, and decent forward growth prospects should serve the dividend well. Without bothering with all the messy and dangerous shenanigans of actually looking for gas and oil itself, Shell expects the tie-up with BG to add around 25% to Shell’s proved oil and gas reserves and 20% to production. The firm will also gain enhanced positions in competitive new oil and gas projects, particularly in Australia LNG and Brazil deep water.

Shell bigs up its own dividend prospects through the deal itself, saying the deal has the potential to unlock further value for both Shell’s and BG’s current shareholders from the combined portfolio. The firm reckons an enhanced set of upstream positions will be a springboard to high-grade the combined group’s longer-term portfolio, increase asset sales and reduce capital investment, which will enhance the firm’s capacity to pay dividends and undertake share buybacks.

It’s all good encouraging stuff, made possible it seems by the current low oil-price environment and BG Group’s weakened share price. Consolidation in the industry seems a natural consequence of the current difficult trading landscape, and it seems likely that Shell will emerge into better times all the stronger for what looks like an astute move.

Has there ever been a better time to buy Shell?

Shell’s valuation looks modest and investors can lock in a decent dividend right now. The firm expects to commence a share buyback programme in 2017 of at least $25 billion for the period 2017 to 2024, which should enhance earnings- and dividend-per-share figures.

Shell’s chairman sounds happy, saying: “This is an important transaction for Shell, accelerating the delivery of our strategy for shareholders. The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world.”

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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