Royal Dutch Shell Plc & Vodafone Group plc: Value Titans Or Value Traps?

Royston Wild runs the rule over London leviathans Royal Dutch Shell Plc (LON: RDSB) and Vodafone Group plc (LON: VOD).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’m looking at the investment case of two FTSE 100 giants.

Oil play in peril

Investor appetite for Shell (LSE: RDSB) has enjoyed a shot in the arm following unexpected strength in ‘black gold’ values over the past fortnight.

The Brent benchmark accelerated away from the lows of $27.67 per barrel struck in January (troughs not visited since 2003) and back above the $35 marker, thanks to fresh weakness in the US dollar.

Fossil fuel majors like Shell were unsurprisingly caught in the updraft, and the British business saw its own share price advance by almost a fifth in the fortnight from Brent’s lows.

Despite this strength however, broker projections indicate that Shell could prove a brilliantly-valued turnaround contender. City consensus suggests the oil giant will recover from a heavy bottom-line dip last year with a 7% advance in 2016, leaving the company dealing on a P/E rating of 12.2 times. On paper, any reading below 15 times is widely considered attractive value.

I’m not so convinced however, and see the bounce as nothing more than a fresh selling opportunity. Rather, I expect the sickly supply/demand imbalance to keep the oil sector firmly on the back foot.

Sure, Shell’s attempts to steady the ship by slashing costs and capex targets are essential in the current climate — the business announced 10,000 job cuts last week in the wake of 2015’s shocking results. But until crude demand steps solidly higher, and OPEC, Russia and the US finally bite the bullet and cut production, I reckon Shell’s earnings are set to keep falling in line with crude prices.

And while Shell defied calls for a dividend cut by keeping the 2015 payment frozen at 188 US cents per share, I believe investors should give expectations of a similar reward — yielding a chunky 7.7% — scant regard thanks to the firm’s weak profits potential and mounting debt pile.

Indeed, I reckon investors should be prepared for fresh earnings and dividend downgrades sooner rather than later.

Ring up delicious returns

Based on conventional metrics, it could be strongly argued that Vodafone (LSE: VOD) fails the acid test when it comes to being considered a hot ‘value stock.’ However, I would consider the telecoms giant a savvy selection despite its poorer ‘paper’ valuation relative to that of Shell.

The colossal costs of Vodafone’s Project Spring investment programme — combined with prior sales problems in its core European marketplace — are expected to push earnings 12% lower in the year to March 2016, the third successive fall if realised.

But unlike Shell, Vodafone has the fuel to generate powerful earnings growth in the years ahead, as the development of its data and voice services in established and emerging regions gives it the base to meet surging user demand.

Indeed, the City expects these measures to deliver a 19% earnings rise in fiscal 2017. And while a consequent P/E rating of 38.7 times may be considered heady at first glance, I believe Vodafone’s huge organic scheme should deliver smashing bottom-line growth further out and keep the multiple toppling.

And value hunters can take consolation in Vodafone’s excellent dividend prospects too. The London firm is anticipated to pay a dividend of 11.5p per share in both 2016 and 2017, resulting in a market-smashing yield of 5.3%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »