With oil prices holding steady above $60/bbl for the first time in two years it’s little surprise that the share price of Royal Dutch Shell (LSE: RDSB) has gained over 10% in the past three months. But although oil prices are rising and Shell’s balance sheet is improving, I’ve got my eyes on a more reliable growth and income stock in asset manager Schroders (LSE: SDR).
The best of a bad bunch?
Shell’s management has done very well in recent quarters and in the nine months to September the company’s cash flow finally covered capital investments and dividend payments, even as its average realised price per barrel of oil equivalent remained a sedate $47. This is due to a series of stellar performances from the company’s downstream refining and trading divisions as well as a cost-cutting drive that has slimmed down operating expenses dramatically.
The $21bn in free cash flow generated in the first nine months of the year also mean that the company’s gearing ratio has fallen significantly from 29.2% to 25.4% year-on-year. This should allow management to restart its share buyback programme sooner rather than later as the BG acquisition beds in nicely and oil prices lead to higher cash flow.
However, while the company has done well to survive the two-year slump in oil prices, I don’t believe its shares represent a stellar bargain at this point in time. While the OPEC supply cuts have led to inventory levels dipping and global economic growth has kept demand rising, it remains to be seen whether American shale producers will ramp up production and serve as an unofficial cap on oil prices.
And with its shares trading at a lofty 18.6 times forward earnings, a good amount of future growth is already priced into Shell’s shares. I reckon this is a hefty premium to pay for a cyclical stock, no matter how well its management team has done over the past few years.
A more consistent performer
Instead of Shell, I’d much rather own Schroders, which boasts a significant stake from the eponymous founding family that maintains a long-term view to running the business and strong growth potential in the years ahead.
The company’s reputation as an asset manager in it for the long haul has proven itself not only with investors such as myself, but also consumers and institutions looking for a money manager. This has allowed the company to continue netting significant inflows from investors over the past few years, even as competitors have suffered significant outflows and falling profits.
In the half year to June, the firm notched up net inflows of £0.8bn, which together with impressive returns from its invested funds, led to assets under management (AUM), the lifeblood of asset managers, rising from £343.8bn to £418.2bn year-on-year. This solid performance continued in Q3 with AUM at the end of September up to £430.2bn.
Looking ahead, I see plenty of scope for this growth to continue as the firm beefs up its presence in relatively untapped markets such as Asia Pacific and North America and adds to its core equity expertise with a greater focus on fixed income and private investments.
With the firm’s non-voting stock trading at only 12 times trailing earnings and offering a very healthy 3.8% dividend yield, Schroders is definitely one of my top FTSE 100 picks for the years ahead.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B and Schroders (Non-Voting). 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.