My perusal of our top FTSE 100 shares is turning back towards the oil business, and today I’m checking out the prospects for Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US)
Here’s Shell’s performance over the past five years, with the latest consensus forecasts for this year and next:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | $50,820m | 509c | +2% | 160c | n/a | 5.6% | 3.2x |
| 2009 | $21,020m | 160c | -69% | 168c | +5% | 5.6% | 1.0x |
| 2010 | $35,344m | 304c | +90% | 168c | 0% | 4.8% | 1.8x |
| 2011 | $55,660m | 461c | +52% | 168c | 0% | 4.2% | 2.7x |
| 2012 | $50,289m | 432c | -6% | 172c | +2.4% | 4.8% | 2.5x |
| 2013(f) | $33,266m | 356c | -18% | 185c | +7.6% | 4.9% | 1.9x |
| 2014(f) | $42,146m | 393c | +10% | 190c | +2.7% | 5.1% | 2.1x |
Profits in the oil business can be erratic, and we see a great example of that above as Shell’s profits reflected the global slowdown.
Steady dividends
But by keeping dividend cover high in years of high earnings, the dividend can be maintained in a considerably less volatile fashion, and income investors have done pretty well from Shell over the past five years. Even the minimum yield of 4.2% in 2011 was still considerably better than the FTSE long-term average, which tends to hover around 3%.
Keeping the dividend flat at 168 cents per share for a three-year period was better than a lot of income stocks managed, and for the year ending December 2012 we’ve already seen the annual payouts starting to rise again. That should continue this year and next — even though there’s a fall in earnings per share forecast for 2013, we’ll hopefully see growth again in 2014.
Tough Q3
Full-year results should be with us on 30 January, but until then we have Q3 figures to go on — and it wasn’t a great quarter. On a current-cost-of-supplies basis, earnings crashed by 32% to $4.2bn from $6.2bn a year previously. A fall was on the cards, but that was bigger than expected.
Higher costs and lower volumes were partly to blame, though performance also took a hit from problems in Shell’s Nigerian operations. But the firm did commit to dividends and lifted its quarterly payment by 5% to 45 cents per share, saying it will speed up its asset sales. The Q3 problems should hopefully be short-term, so let’s hope for no surprises at the end of the month.
Set to outperform
The Shell share price has underperformed over the past five years, growing by just 25% while the FTSE has achieved almost double that.
But with the world’s economic strength starting to reassert itself, demand for the black stuff can surely only rise, and we should hopefully be in for a few years of steady dividend increases. Shell’s shares are currently on a forward P/E of under 10 based on 2014 forecasts. And though lower-than-average multiples for the big oil companies might well be justified due to the unpredictability of their earnings, given Shell’s focus on handing out the annual cash, I can see shareholders enjoying a FTSE-beating year in 2014.
Verdict: The oil business is looking good for 2014!
