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The Best Reason To Buy Royal Dutch Shell Plc

royal dutch shellThe big oil pair, Royal Dutch Shell (LSE: RDSB) (NYSE RDS-B.US) and BP, saw their share prices slide during the downturn, but Shell has been recovering nicely of late. Its price is up 18% over the past 12 months, to 2,557p compared to just 5% for the FTSE 100 average — and even over five years it’s ahead, with a 53% gain against 40%.

A dip

Shell saw its pre-tax profit and earnings per share (EPS) fall heavily last year — profit by 33% and EPS by 39% in dollar terms. Some of that was due to decreasing demand because of the worldwide recession, and some was down to rising upstream exploration costs. But since then, Shell has divested some lower-margin operations and has cut costs, and with demand picking up a little there’s a 40% recovery in EPS forecast for this year.

So that’s one good reason to consider buying Shell now.

Another is its dividends. The annual payout was frozen in 2009 and remained at 168 cents per share for three years in a row. But in 2012 it started rising again, and that looks set to continue into the next two years of forecasts.

The yield has remained robust too, dropping only as far as 4.2% in 2011. By 2013 it was back up to 4.8%, and for the next two years there are yields of 4.4% and 4.5% penciled in — only down a little because the share price has climbed.

Highly priced?

What about valuation? Shares on a year-end P/E of 8.2 for 2012 would have been nice to pick up, but even after the price recovery we’re still only looking at a forecast P/E of around 11 for this year and next — a below-average P/E for a share providing an above-average dividend yield.

Compared to assets, Shell’s looking reasonably valued too — the shares are on a price to tangible book value of only around 0.6, which is significantly below BP.

Looking at Shell’s PEG ratio (which compares P/E to expected EPS growth), we see a lowly value of just 0.3 for 2014, which is well below the 0.7 maximum that many growth investors look for. Admittedly Shell is more of a cyclical stock than a straight growth stock, but it does suggest that this year’s forecast growth is not fully valued yet.

Looking good

So yes, on earnings growth potential, on strong and rising dividends, and on what looks like an undervaluation on fundamentals, Shell is clearly worth a closer look.

But with all of those in place, the overriding thing that ties them all together is that Shell is one of the world’s big players in that unavoidable energy market that is oil and gas. And it’s not BP.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.