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I’d happily sell Royal Dutch Shell to buy this FTSE 100 growth stock

Image source: Getty Images.

Investor appetite for Royal Dutch Shell (LSE: RDSB) has continued to march higher in the early knockings of quarter two thanks to fears of oil supply disruptions in the Middle East.

Heightened tensions over military action in Syria have continued to propel the Brent benchmark beyond the $70 per barrel landmark, the indicator hitting fresh two-and-a-half-year peaks around $72 earlier in Tuesday’s session.

I remain less than enthused by big energy players like Shell, however, as well as the potential for colossal near-term dividends (yields stand at 5.5% and 5.6% for 2018 and 2019 respectively). I have alluded previously to the massive output hikes over in the US but this is only part of the problem as rising fossil fuel investment in other markets like Canada and Brazil look likely to keep stockpiles close to overflowing long into the future.

City analysts are expecting Shell to report earnings growth of 56% in 2018 and 9% in 2019, but I see the potential for further bottom line expansion as likely to become increasingly difficult as supply growth looks set to outpace that of global demand.

And so these huge dividend yields, as well as a prospective P/E ratio of 14 times, appeals little to me at the moment.

Transatlantic titan

In fact, I’d be pretty content to sell out of Shell in order to buy another brilliant Footsie-quoted share — Ashtead Group (LSE: AHT).

The profits outlook for the oil giant is far from assured given the prospect of surging production from North and South America. Conversely, the earnings picture for Ashtead is much more secure as its busy M&A programme helps sales momentum to click through the gears.

In the quarter to January the power equipment provider saw rental revenues rise to £845.5m, up 24% year-on-year. This marks an obvious improvement in recent months given that rental turnover had risen 21% for the nine months ending January.

Ashtead forked out £315m on acquisitions during May-January, up from £196m in the corresponding period last year. It also chalked up an £859m capital expenditure bill in the period. The business’s formidable cash generation means it should remain well placed to keep investing in its operations in order to capitalise on the favourable trading environment, particularly in North America.

Revenues at its Sunbelt division across the Atlantic boomed 18% in the last quarter to $3.12bn and, with the economy Stateside going from strength to strength City analysts expect solid earnings growth of 25% and 21% in the years to April 2018 and 2019 respectively.

Ashtead has lifted dividends at a compound annual growth rate of 29.7% during the past five years and, with profits expected to keep on booming, it comes as little surprise that further generous hikes are anticipated. Last year’s 27.5p per share payment is predicted to advance to 32.8p in the present period and again to 37.8p in fiscal 2019, resulting in handy-if-unspectacular yields of 1.6% and 1.8% for these respective forward periods.

At current prices Ashtead changes hands on a forward P/E ratio of 15.9 times. In my opinion this is far too cheap given the strong possibility of sustained profits and dividend expansion.

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Royston Wild has no position in any of the shares mentioned. 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.