Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has been one of the FTSE 100’s main laggards during the past year. However, there are still plenty of great reasons to invest. Indeed, some might consider Shell to be one of the best investment opportunities in the FTSE 100 right now.
A compelling valuation
To start with, one of the most attractive qualities about Shell right now is the company’s rock bottom valuation. Despite being the fourth largest oil & gas company in the world by market capitalisation, Shell is currently trading at a historic P/E of only 8. In comparison, Shell’s closest peer, US listed oil giant Chevron, is trading at a historic P/E of 9.6.
Moreover, Shell and the rest of oil & gas producers sector as a whole is actually trading at one of the lowest valuations seen at any point during the last 10 years.
A dividend champion
In addition to Shell’s compelling valuation, the company currently offers an attractive dividend yield of 5%. This payout is expected to rise by 10% during the next year or so, implying a yield of 5.5% for 2014.
Furthermore, Shell is also returning cash to investors by buying back stock. Currently the company is on track to buy back around $4.5 billion of its own shares this year. With Shell’s share price near 52-week lows, the company should be able to buy more stock back with its $4.5 billion allowance, improving the effect of the buyback.
Room for growth
There has been much talk in the City recently about mergers in the oil & gas sector. There are sound reasons behind this chatter as while oil majors such as Shell struggle for growth, their smaller peers are raking in the profits.
With a balance sheet flush with cash, Shell looks well placed to capitalise on this trend. In addition, the company has five major projects set to come online during the next year or so, which management estimate should boost the company’s cash flow by $4 billion.
What’s more, Shell is focused on improving its returns from existing assets and not chasing higher levels of production. For example, Shell’s multi-billion dollar asset divestment program has driven the company’s return-on-assets upto 8%, from 6% at the beginning of the divestment program. Although this may not seem like much, Shell has over $300 billion in assets, so a 2% increase is an additional $6 billion a year for the company.
All in all, Shell is an old dog and its performance this year has been uninspiring. However, the company still has plenty of room to grow and the current valuation is highly appealing.
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> Rupert owns shares in Royal Dutch Shell.