4 Reasons Why Royal Dutch Shell Plc Is Now A Buy

royal dutch shell

Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has come in for a lot of criticism over the past year, and it’s easy to forget that it’s one of the world’s largest, oldest and most successful businesses.

Under its new chief executive, Ben van Beurden, Shell is starting to deliver much-needed changes to its investment policy, and to tighten its focus on shareholder returns. After a long period of range-bound stagnation, I think that Shell’s share price could ‘pop’ this year, making now an excellent time to buy.

It’s an outperformer

Shell is widely seen as having underperformed the FTSE 100 over the long term, but it hasn’t.

On a total return basis — share price gain plus dividends — Shell has beaten the FTSE 100 over the last ten years, delivering an average annual total return of 8.5%, versus 8.1% for the FTSE.

Re-rating earnings

Mega cap companies like Shell don’t usually deliver rapid growth, but Shell’s PEG ratio (price-to-earnings-growth) is currently just 0.65. A PEG ratio of less than 1 is seen as a bullish indicator of strong earnings growth, and followers of famed growth investor Jim Slater place great weight on this metric.

Although Shell is too big to be an out-and-out growth firm, there is considerable room for earnings growth. Analysts’ consensus forecasts suggest that Shell’s earnings per share may grow by around 25% in 2014, providing solid support for share price gains.

Dividend priority

In 2013, £1 of every £11 paid out in dividends in the UK came from Shell, and the firm has an unbroken record of dividend payments that stretches back for many decades.

New CEO van Beurden has signalled an increased focus on shareholder returns, and this year’s dividend is expected to rise by 4%, giving a prospective yield of 4.9%.

New broom sweeping clean

I believe that Shell has rightly been accused of being too ready to invest in giant-sized projects with uncertain returns, such as its Arctic exploration programme, on which it has spent $5bn without yet drilling a well.

Mr van Beurden’s early actions suggest that this spendthrift phase of Shell’s history may be coming to a close, but, in my view, the acid test for Mr van Beurden will be the projects he does approve.

These new projects will help to re-shape Shell, and if investors are impressed, they could propel Shell’s share price to new highs.

Refining the dividend

Even though Shell's dividend is a byword for safety and reliability, the firm has been forced to increase its borrowings over the last few years, in order to maintain its payout.

Before deciding whether to buy shares in Shell -- or any firm -- it's worth looking for clues which may warn of problems ahead. The 'five golden dividend rules' listed in "How To Create Dividends For Life" provide an ideal starting point for clued-up dividend investors.

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Roland owns shares in Royal Dutch Shell.