Why I’d avoid Royal Dutch Shell plc to buy this Footsie 5% yielder

Royston Wild explains why share pickers should avoid Royal Dutch Shell plc (LON: RDSB) today.

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Royal Dutch Shell (LSE: RDSB) may have flown to three-year peaks in recent weeks, but I for one am not piling in. And I doubt I will be any time soon.

Investor appetite for the fossil fuel goliath has surged, of course, on the back of geopolitical problems in the Middle East, as well as a new OPEC supply freeze, factors that have helped Brent values plough through the psychologically-critical $60 per barrel marker.

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I reckon that share pickers may have been a tad premature in propelling black gold values higher, however, given the still murky outlook for the oil market’s enduring supply/demand imbalance. Most concerning is news that crude production Stateside continues to balloon, with latest Energy Information Administration data showing US producers pulling 9.7m barrels per day of the black stuff out of the ground, a fresh record.

And oil majors are ramping up their operations to cotton on to the recent upswing in crude prices, Chevron being the latest to announce a large hike in shale investment earlier this week. These measures threaten to keep the country’s stockpiles close to spilling over.

While City analysts are predicting earnings surges of 225% in 2017 and 11% in 2018 at Shell, I do not believe a forward P/E ratio of 17 times is reflective of the company’s uncertain long-term earnings outlook in the face of ongoing oversupply.

I am also happy to look past the driller’s gigantic 6% dividend yield through to the end of 2018 and continue sitting on the sidelines.

Home comforts

Instead, I believe that both growth and dividend investors would be better off splashing the cash on Britain’s housebuilders like Persimmon (LSE: PSN).

That is not to say that the homebuilders are without their share of risk today. Indeed, signs of protracted pressure on the economy (the Office of Budget Responsibility has forecast a steady slowdown in GDP growth through to the end of the decade) casts some doubt on the strength of homebuyer appetite looking ahead.

Latest Bank of England mortgage data underlined the effect of a cooling economy on buyer appetite. Mortgage approvals for home purchases clocked in at a 13-month low of 64,575, reflecting “weakened consumer purchasing power and substantial consumer wariness,” as well as the potential for further Bank of England rate hikes.

Be that as it may, the likes of Persimmon are still — largely speaking — not putting up homes at the rate at which they are required. And this is likely to remain the case for some time to come as the government is yet to spell out how it aims to supercharge homes construction in the years ahead.

Reflecting this positive backcloth, Persimmon announced a month ago that “we are now fully sold up for the current year and have c.£909 million of forward sales reserved beyond 2017, an increase of 10% on the same point last year.” It added that “pricing remains firm across our regional markets.”

So it comes as little surprise that City analysts are expecting the York business to deliver earnings growth of 19% in 2017 and 5% next year, figures that create a bargain-basement forward P/E ratio of 11 times.

And with the construction giant also throwing out gigantic yields of 5% and 5.1%, I reckon Persimmon is a terrific Footsie share to buy today.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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