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Are Royal Dutch Shell Plc, BT Group plc And GlaxoSmithKline plc Brilliant Bargains Or Value Traps?

Today I am looking at the investment prospects of three cut-price FTSE candidates.

Royal Dutch Shell

Shares in Royal Dutch Shell (LSE: RDSB) have rattled steadily lower since last summer due to fears over the future of the crude price. Indeed, the stock has shed a fifth of its value during the past six months alone, prompting many to engage in a spot of bargain-hunting — the fossil fuel colossus has risen 16% in the past seven days, thanks in some part to the military escalation in Syria.

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Conventional metrics suggest that Shell is quite the bargain at the current time. Despite a projected 33% earnings decline in 2015, the company trades on an earnings multiple of just 12.4 times, comfortably below the benchmark of 15 times that represents brilliant value. And an estimated dividend of 186 US cents per share, although down from 188 cents in 2014, creates a gigantic yield of 7.6%.

Still, I believe the waves of negative news hitting the oil sector threatens to send crude sinking again — just today the IMF cut its 2015 global growth forecasts to 3.1% from 3.3% previously, the lowest reading since 2009. With US and Chinese inventories remaining chock-full of material, and total supply levels continuing to tick higher, I believe earnings — and consequently dividends — at Shell are in danger of trending much, much lower.

BT Group

Unlike Shell, I reckon that telecoms giant BT (LSE: BT-A) is a shrewd pick for value seekers. Like the oil producer, BT has seen its share price sink in recent months, and the business has fallen 10% from the record peaks around 480p struck in July. But thanks to the massive investment in its ‘quad play’ capabilities, I reckon the stock should start trekking higher again sooner rather than later.

The London firm’s decision to take on the might of Sky is paying off handsomely, and revenues at its BT Consumer arm ticked 3% higher during April-June, to £1.1bn, maintaining the steady momentum of recent quarters. The company’s BT Sport channels are going down a treat with couch potatoes up and down the land, while its extensive fibre-laying programme is enjoying terrific traction, a key battleground in the entertainment services segment.

The City expects the vast cost of these measures to push earnings 3% lower in the 12 months to March 2015, although this still produces a decent P/E ratio of just 13.5 times. And BT’s solid long-term growth prospects are anticipated to keep the dividend rising, resulting in a payment of 14p per share for the current year alone and creating a chunky 3.3% yield. I expect BT to become a very lucrative share pick in the years to come.


I believe similar bullishness can be attached to pills play GlaxoSmithKline (LSE: GSK), too. The company has thrown the kitchen sink at rejuvenating its product pipeline — it currently has 40 new molecular entities (or NMEs) at the late-stage testing phase, and announced plans to file an application for its Relvar Ellipta treatment in Japan early in 2016 in September. The drug is used to battle the effects of chronic obstructive pulmonary disease (or COPD).

GlaxoSmithKline also received positive Phase III data for its Triumeq HIV treatment last month, as well as a positive opinion from the European Medicines Agency recommending marketing authorisation for its Nucala asthma treatment. Shares have failed to react strongly thanks to enduring fears over patent losses, however, and GlaxoSmithKline has surrendered 17% of its value during the past six months alone.

 But I believe that current weakness provides a great opportunity for savvy investors to pile in. GlaxoSmithKline is expected to endure a 21% earnings slide in 2015 due to the aforementioned exclusivity losses across key labels, although the bottom line is expected to bounce from next year. And this year’s estimate provides a very-decent P/E ratio of 16.8 times. Furthermore, I reckon the firm will make good on a dividend of 80p per share through to 2017, yielding an exceptional 6.1%.

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

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