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Is Now The Right Time To Buy Royal Dutch Shell Plc?

ShellYou can pay a price for quality, but in the case of Royal Dutch Shell (LSE: RDSB) (LSE: RDSA) (NYSE: RDS-B.US), I think it may be worthwhile. While peer BP faces years of costly legal battles in the US, plus a potential $18bn fine, Shell does not.

Similarly, although Shell does have activities in Russia, they are mostly geared to gas production, and seem less likely to be affected by western sanctions than Russian oil producer Rosneft, in which BP has a 20% stake.

Against this backdrop, it’s no surprise that Shell offers a prospective yield of ‘just’ 4.7%, while BP offers around 5.4%.

However, Shell is hardly a growth stock, and its shares have gained a FTSE 100-beating 12% so far this year — so is the FTSE’s largest member still a buy?

Valuation

Let’s start with the basics: how is Shell valued against its past performance, and the market’s expectations of future performance?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

12.4

2-year average forecast P/E

11.0

Source: Company reports, consensus forecasts

Shell’s forecast P/E of 11 doesn’t seem unreasonable, given the firm’s renewed focus on profit growth and shareholder returns, plus its decent yield.

To put Shell’s valuation into context, embattled BP currently trades on a two-year forecast P/E of 9.0, while the FTSE 100 has a P/E of just under 14.

What about the fundamentals?

Of course, it’s unwise to invest based on valuation alone — we also need to take a look at Shell’s fundamental performance, too:

5-year compound average growth rate

Value

Sales

10.2%

Net profits (post tax)

5.4%

Dividend

1.4%

Book value

6.9%

Source: Company reports

It’s worth noting that Shell’s apparent 10.2% average annual sales growth is flattered by the oil price crash that took place in 2009. Shell’s revenues are expected to be around $448bn this year — lower than any year since 2011, and lower than in 2008.

The growth rate of Shell’s profits has also been boosted by the rapid recovery of the oil price after the 2009 crash. Indeed, the Shell’s true growth rate over the last five years is probably best indicated by its dividend growth history — not a lot.

Things are changing

However, things are looking up for Shell shareholders. The firm has a newish chief executive, Ben van Beurden, who has proved himself willing to say no to projects that may not provide decent returns, and to selectively sell assets, in order to trim Shell’s bloated portfolio and raise cash.

Shell’s dividend payout is expected to rise by nearly 5% this year, and by 6% next year, and I rate the shares as an attractive buy for long-term income.

However, the firm's strong share price performance over the last year suggests to me that further gains may be unlikely in the near term.

I reckon that investors looking for more immediate profit opportunities should probably look elsewhere, at firms such as those highlighted in "Where We Think The Smart Money Is Headed".

This brand-new wealth report from the Motley Fool's Share Advisor team is worth a closer look, in my view, as the team's previous tips have risen by an average of 22.1% over the last two years.

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Roland Head owns shares in Royal Dutch Shell. 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.