Given recent oil price woes, it may be surprising to find out that Shell (LSE: RDSB) has outperformed the FTSE 100 in the last decade. Its shares have risen by 31%, while the wider index is up 18%. And when dividends are added to the mix, Shell’s relatively high yield has made it a significantly superior investment to the FTSE 100 in the last 10 years. Could more outperformance lie ahead over the next decade?
A changing company
In terms of where Shell will be as a business in 10 years, the chances are that it will be financially stronger. Its acquisition of BG Group is expected to push free cash flow significantly higher, with $25bn expected by 2020 if oil remains at around $60 per barrel. This compares to free cash flow which has averaged just $5.2bn per annum in the last three years. This improving cash position should provide the company with a wide range of options.
Firstly, it could increase dividends per share at a rapid rate. Shell already yields around 6.7%, so any increase to its dividends could cause investor sentiment to rapidly improve. A higher dividend could make the company one of the highest-yielding blue chips around, which at a time when inflation is set to move higher could lead to a rapidly rising share price.
Secondly, Shell could use its improved free cash flow to make acquisitions. It has already bought BG Group in one of the most significant Oil & Gas acquisitions of all time. So far, the integration process has been successful and if it continues to remain on track, it could encourage Shell to buy additional assets in future years. As well as strong and improving cash flow, the company also has a debt-to-equity ratio of just 49%. This indicates that other major acquisitions could be entered into within the next decade without compromising the company’s financial stability.
The Oil & Gas industry
Of course, Shell’s future will be largely dictated by the price of oil and gas in future years. Its free cash flow estimates assume an oil price of $60 per barrel, which may prove to be a somewhat conservative estimate. In the developing world, demand for oil and gas is likely to rise significantly in future years, as wealth levels rise and the use of cars, as well as demand for energy, increases.
Similarly, the Trump administration may relax regulations on fossil fuels and make the switch towards greener fuels much slower. This could mean that demand for oil is higher than previously forecast, which could force its price higher. As such, Shell’s profitability may surprise on the upside in the next decade.
The outlook for Shell appears to be hugely positive. It seems to have internal and external catalysts to push its share price higher. It also offers an exceptionally high income return which could move even higher if free cash flow rises as forecast. Since it currently trades on a price-to-earnings growth (PEG) ratio of 0.5, it seems to offer excellent value for money given its long-term potential. As such, more outperformance of the FTSE 100 appears highly likely over the next 10 years.
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Peter Stephens owns shares of Royal Dutch Shell B. 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.