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Despite Recent Declines, I’m Still Buying Royal Dutch Shell Plc And GlaxoSmithKline plc

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Sometimes the market presents an opportunity that’s too hard to pass up. And amidst the recent market chaos, two once-in-a-lifetime opportunities have emerged in the form of Royal Dutch Shell (LSE: RDSB) and GlaxoSmithKline (LSE: GSK).

Market sentiment couldn’t be more negative for these two companies. For example, over the past six months, Shell and Glaxo’s shares have slumped 22.3% and 13.1% respectively. Shell’s shares printed a new five-year low at the end of August. 

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However, based on historic data, current trends and management predictions, these declines look to be overdone. 

Oil issues 

Shell’s shares have fallen in line with the price of oil, and many of the company’s peers have also seen their shares slump to five-year lows during the past few weeks. 

But these declines could present an opportunity for investors. Indeed, Shell is still profitable, has a rock-solid balance sheet and is slashing costs to improve margins. What’s more, Shell remains one of Europe’s largest refiners, and one of the world’s largest oil traders. First-half refining and marketing profits jumped 93% year-on-year to $5.6bn. 

Still, many investors are concerned about the state of Shell’s dividend. The company’s cash flow from operating activities slumped 42% to $13.2bn during the first half of the year, barely covering capital spending of $12.4bn. As a result, Shell’s dividend bill of $5.2bn in the first-half was paid with debt. 

Nevertheless, while the figures may suggest that Shell will have to cut its dividend payout, the company has the capacity to maintain its payout at present levels in the short term as earnings fall. Shell’s net gearing is 14.3%, and the company is selling off some assets to boost its credit profile. Also, capital spending is set to fall during the next few years as the company adjusts to the oil price environment. 

So overall, Shell’s lofty dividend yield of 7.5% looks to be safe for the time being. 

Out of favour

It seems as if Glaxo has become the FTSE 100‘s most disliked company. Since the end of April, the company’s shares have lost a fifth of their value as the City has expressed concern about the sustainability of the group’s dividend payout. 

But the City’s negative views run contrary to the projections put out by Glaxo’s own management. 

Glaxo’s management has stated that the company’s dividend payout will be maintained at 80p per share for the next few years. While I’m always sceptical about management forecasts, I’m inclined to believe that this will be the case. Glaxo’s management has a reputation to uphold, and there’s nothing more damaging to a reputation than going back on a commitment to maintaining a dividend. 

While City projections estimate that Glaxo’s dividend payout won’t be covered by earnings per share this year, figures suggest the payout will be covered by earnings next year.

Moreover, based on the number of new treatments Glaxo currently has under various stages of development, management believes that the group can steadily grow earnings by the mid-to-high single digits” from 2016 to the end of the decade, further improving dividend cover.

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Rupert Hargreaves owns shares of GlaxoSmithKline and Royal Dutch Shell B. The Motley Fool UK has recommended GlaxoSmithKline. 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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