Why I think the Shell share price is still a brilliant buy

G A Chester discusses the valuation and prospects of Royal Dutch Shell plc Class B (LON:RDSB) and a mid-cap oil equipment firm.

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In the winter of 2015/16, during the depths of the slump in the oil price, many of us here at the Motley Fool were reminding readers of Warren Buffett’s famous exhortation to be “greedy when others are fearful.” Investors who piled into stocks like FTSE 100 giant Royal Dutch Shell (LSE: RDSB) and FTSE 250 oil equipment firm Hunting (LSE: HTG) will be sitting pretty today.

The question now is whether these stocks still offer investment value at their current prices. Here’s my view on their valuations and prospects.

Up with events?

Hunting released a trading update today, ahead of its AGM. It told us that despite slow and challenging markets in some areas, “overall, the group has started the year well … The first quarter of 2019 saw a continuation of the level of revenues and profits reported in Q4 2018.”

Looking ahead, there are a number of positives. Activity levels have picked up in Canada after extremely cold weather in the early part of the year. In the US, commentators predict improving market sentiment as shale plays overcome takeaway capacity issues (total capacity for moving oil out via pipeline, rail, and truck). Meanwhile, expansion of Hunting’s Titan business is on schedule for completion by the end of Q2, and will provide more efficient manufacturing on a lower cost base.

The company’s shares, which were on offer for less than 250p back in early 2016, are currently trading at 635p (a gain of over 150%). Buyers today are paying 16 times forecast 2019 earnings, with a prospective 1.3% dividend yield. Further out, City analysts have pencilled in earnings growth in the region of 20% for 2020. I’d say the current valuation is up with events, and I rate the stock a ‘hold’.

Still great value?

Shares of heavyweight Shell have also delivered impressive returns since early 2016. From lows of under 1,400p, they’ve climbed to over 2,500p for gains in excess of 75%. Furthermore, investors at the lows locked in a super-high dividend yield. On top of the capital gains they have a 33% (and counting) return just from dividends.

My Foolish colleague Roland Head named Shell as his top share for April, while fellow Fool Alan Oscroft recently wrote that if he had to choose just one stock to buy and hold for 10 years, Shell would be it. I can’t say I feel quite as strongly about the company as Alan, but I do believe it continues to offer good value for investors.

After a very strong financial performance in 2018, the completion of a $30bn divestment programme and starting up of key growth projects, the prospects for 2019 and beyond look bright. Yet the company trades at little more than 12 times forecast 2019 earnings, which is cheap relative to the FTSE 100 long-term historical average of 14. The prospective dividend yield of 5.8% also looks great value compared with the wider market. As such, you can count me as another Fool who rates the stock a ‘buy’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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