Royal Dutch Shell Plc Could Be Worth 3,957p

Shares in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) haven’t had a bad year, gaining 10% over 12 months against 6% for the FTSE 100 — and that was with better dividend yields, too.

royal dutch shellLagging the FTSE

Over five years, however, Shell has managed a gain of only around 42% compared to 53% for the index, although those superior dividends will bring the overall result closer. Today the price stands at 2,430p.

Higher exploration costs helped dent last year’s earnings, with Shell recording a 39% fall in basic earnings per share (EPS) on a current-cost-of-supplies basis. But analysts are expecting a good part of that drop to be reversed this year, putting the shares on a forward P/E of around 12. And there are modest rises in EPS forecast for the next few years too.

So what might a Shell share be worth in five years time?

There’s a finger-in-the-air suggestion of around 240p in earnings per share for the year ended December 2018, which would be 16% up on 2014’s forecast figure of 207p. That’s not a great rise over five years, but based on the long-term average FTSE P/E of around 14 it would suggest a share price of 3,360p.

Cash makes the difference

That’s 38% above the current price, and though that might be a solid performance, few would consider it sparkling. But how about the effect of those dividends?

We’re looking at predicted yields of 4.6% and 4.7% for this year and next, with the annual payment rising to about 127p per share by 2018 — that 12% gain on 2014’s predicted 113p is less that the City’s expectations for earnings growth, and would take us to a dividend cover of around 1.9 times by the end of the period.

In total, we could be seeing an extra 597p on top of the share price rise, taking the total value of a share to 3,957p by the end of 2018. That’s a 63% overall gain, and that’s looking a good bit more attractive.

Should we buy?

Analysts seem to like Shell, with 14 out of 40 telling us we should buy the shares against just two who think we should sell — the rest are sitting on the fence.

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Alan does not own any shares in Royal Dutch Shell.