With the oil price hitting its highest level in two years this week, the prospects for oil producers such as Shell (LSE: RDSB) may be improving. Production cuts put in place over the last year may finally be starting to have an impact on the price of black gold, while increased geopolitical tensions and rising demand are also likely to be contributing factors to its recent rise.
Looking ahead, Shell has the potential to raise its dividend and become a strong income play for the long run. However, it is not the only company which could offer a sound long-term outlook for income investors.
In the next two years, Shell’s profitability is expected to improve significantly. After a challenging few years, its pre-tax profit is forecast to rise from around £1.6bn in 2015 to as much as £18.3bn in 2018. This transformation is at least partly due to its decision to purchase BG Group. This provides the company with an enlarged asset base and also increases its exposure to liquefied natural gas (LNG). It should mean greater diversity as well as providing a boost to its profitability.
As well as the acquisition of BG, the company’s financial performance is expected to improve because of its strategy. It has sought to cut costs in recent years, while also undertaking an asset disposal programme. This has created a more efficient business model and allowed greater potential for dividend growth over the medium term.
In terms of its dividend affordability, Shell’s 6.5% forward dividend yield is expected to be fully covered by net profit in 2018. This suggests that it is not only sustainable, but could increase significantly over the coming years. Further asset disposals, more cost cuts and now the potential for a rising oil price could combine to create one of the FTSE 100’s most enticing income stocks for the long term.
Also offering upbeat income prospects is greeting cards retailer Card Factory (LSE: CARD). It reported half-year results on Tuesday which sent its shares lower by around 15%. This was largely due to higher costs eating into profitability, with the company’s profit before tax declining by over 14%.
However, it was able to maintain its special dividend of 15p per share while also increasing interim dividends by 3.6% to 2.9p per share. This means that the company has a dividend yield of around 7% at the present time. This suggests that it should offer a return which is well in excess of inflation in the long run, with it committed to returning excess capital to investors via special dividends in future.
Clearly, the outlook for UK retailers is relatively uncertain. However, Card Factory trades on a relatively attractive price-to-earnings (P/E) ratio of 14.4 at the present time. Alongside its high yield, this indicates that it has a wide margin of safety and could be worth buying for the long run.
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Peter Stephens owns shares in Shell and Card Factory. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.