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

Royston Wild considers whether bargain chasers should snap up Royal Dutch Shell Plc (LON: RDSB) and GlaxoSmithKline plc (LON: GSK).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

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.

More on Investing Articles

A couple celebrating moving in to a new home
Investing Articles

2 key stock picks for reliable passive income

I’m looking at stocks that can deliver reliable passive income to complement my growth picks, and I think I’ve found…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

In penny stock territory, is the Rolls-Royce share price set to soar?

The Rolls-Royce share price has sunk recently, falling into penny stock territory. But with flying hours recovering, is it too…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Lloyds shares drop 20% in 4 months. Should I buy now?

Lloyds shares have lost a fifth of their value since peaking on 17 January this year. But after rebounding from…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

As the stock market recovery stalls, should I wait to buy?

Has the stock market recovery run out of steam? If so, what does that mean for our writer's portfolio? Here…

Read more »

Diagonal chain made of zeros and ones. Cryptocurrency and mining.
Investing Articles

At 55p, is the Argo Blockchain (LON:ARB) share price too cheap to miss?

With a low P/E ratio and strong financial results, could the Bitcoin miner be good value for money?

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Here are 2 recession-proof FTSE stocks!

In the face of current economic uncertainty and fears of a looming recession, this Fool identifies two recession-proof FTSE stocks.

Read more »

British Pennies on a Pound Note
Investing Articles

Here is 1 penny stock primed to benefit from the construction boom!

Jabran Khan delves deeper into a penny stock that he believes could benefit from the construction boom, and explains why…

Read more »

Various denominations of notes in a pile
Investing Articles

Here is 1 top passive income stock to buy and hold!

Jabran Khan wants to boost his passive income stream through dividends and has identified this insurance giant as a way…

Read more »