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Royal Dutch Shell Plc & GlaxoSmithKline plc: Brilliant Bargains Or Value Traps?

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Today I am looking at two FTSE 100 giants attracting the attention of value hunters.

Energy pick a risk too far

As supply/demand dynamics across the oil industry continues to worsen, I believe Royal Dutch Shell (LSE: RDSB) can be considered a bona-fide value trap at the present time.

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Just today Investec slashed its Brent forecasts for 2016 and beyond. The broker now expects an average Brent price of $54 per barrel for 2015 to slump to $40 in the current period, before rising to $50 next year. A long-term forecast of just $55 is currently on the table.

However, even these forecasts may be considered a tad heady given the current direction of oil prices — Brent has skidded to fresh lows since 2004 around $32 per barrel in recent days. Indeed, Goldman Sachs’ $20 per barrel near-term target is becoming all the more likely as global production heads steadily higher and economic cooling saps demand.

Although Shell is trying to offset these problems by slashing costs and selling assets, I believe the producer remains a risk too far for savvy investors, as the structural supply changes needed to push earnings higher again will take some time to achieve.

Earnings are expected to have slipped 42% in 2015, although a 7% uptick is anticipated for 2016. I would consider a recovery of any sorts a precarious prediction in the current climate, and a P/E rating of 12.2 times fails to reflect this.

The dividend is expected to be cut to around 180 US cents per share for 2015 and 2016, down from 188 US cents in 2014 but still yielding a handsome 7.7%. But I believe dividend seekers should expect even larger payout reductions given Shell’s collapsing earnings outlook and hulking debt levels.

Drugs darling set to surge

Medicines giant GlaxoSmithKline (LSE: GSK) is certainly not without peril itself. The impact of revenues-crushing patent losses is set to linger a little while longer, while the often hit-and-miss nature of drugs development also means that future earnings are far from guaranteed.

But with GlaxoSmithKline’s renewed development drive resulting in a steady string of product approvals, and the business making shrewd acquisitions in hot growth areas to boost its long-term pipeline, I reckon investors can expect stellar returns in the coming years.

And with surging healthcare demand in emerging market bolstering the fruits of these endeavours still further, GlaxoSmithKline is expected to bounce back from four successive earnings declines with a 10% bounce in 2016. Such a figure leaves the drugs play dealing on a very-reasonable P/E rating of 15.8 times.

On top of this, GlaxoSmithKline’s vow to shell out a dividend of 80p per share through to 2017 creates a jumbo yield of 5.8%. I fully expect the Brentford business to make good on these intentions as its next generation of earnings drivers take off, and anticipate payouts to trek higher again in the years ahead.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Royal Dutch Shell B. 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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