This Thing Is Telling Me To Buy Royal Dutch Shell Plc

G A Chester is excited by a key valuation measure of Royal Dutch Shell Plc (LON:RDSB).

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Top FTSE 100 company Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) pulled in a massive $467bn of revenue last year and made a profit of £24bn. This is a global heavyweight by any measure.

Shell is undergoing something of a transformation, shifting its focus from production volumes to capital efficiency and profitable growth for shareholders. It’s not a quick process for a company the size of Shell, but management is making good progress.

Shell has completed $21bn of divestments during the last three years, with more to come, and has invested in new higher-growth projects. Five of these are due to come on line during the next 18 months, and are expected to add over $4bn to cash flow for 2015.

Cash flow is the lifeblood of dividends, and it’s Shell’s current dividend yield and the prospect of good income growth to come that has me excited about the company.

Shell’s history of annually increasing — or occasionally maintaining — its dividend stretches back into the mists of time. We’ve just been through a mediocre spell for dividends, but with the company refreshing its portfolio for growth, I’m expecting income rises to pick up again; in fact, it’s already started.

Shell’s earnings took a dive during 2009 in the rough economic seas following the financial crisis. For 2010 and 2011 the board held the dividend at 168¢, while waiting for earnings to come back and the outlook to improve.

Last year Shell gave shareholders a modest 2.4% increase in their dividend to 172¢, which was covered a healthy 2.5 times by earnings. We can take it as a sign of management’s increasing confidence in the outlook, that the first two quarterly dividends this year have been upped by 4.7%, putting Shell on track for a 180¢ payout for the full year.

Shell declares dividends in dollars, but pays in sterling. Using the actual sterling dividends for the first two quarters of this year, and assuming Q3 and Q4 payments at current exchange rates, we would see a full year payout of around 114p. That equates to a 5.2% yield, with the shares at 2,187p at the time of writing.

So, Shell is offering a juicy yield, well above the FTSE 100 average, and I reckon there’s every prospect of that income pacing or outpacing inflation in the years to come.

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 does not own any shares mentioned in this article.

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