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Are Royal Dutch Shell shares a ‘buy’?

Royal Dutch Shell (LSE: RDSB) is one of the most popular stocks in the UK. But after a one-year share price rise of approximately 20%, are the shares a ‘buy’ today? Let’s take a closer look at the investment case.

Q2 results

With oil prices having moved significantly higher over the last year, profits at Shell are on the rise. Recent second-quarter results released on 26 July revealed that income rose to $6.02bn for the quarter, an increase of 290% on the same period last year. For the half-year, income was 135% higher than last year at $11.9bn. Clearly, the group is benefitting from the recent rise in the price of black gold.

The world’s second-largest oil company also took the opportunity during its Q2 results to announce that it is starting a $25bn share buyback programme. This is another clear signal that the oil major has recovered from the rough patch it experienced in recent years when oil prices fell below $30 per barrel. Chief Executive Ben van Beurden commented that the share buyback is an “important step” towards the delivery of a world-class investment case. So these recent results show that the group has considerable momentum at present with the price of Brent Crude oil in the mid $70s.

Dividend appeal

One big appeal of owning Royal Dutch Shell is its massive dividend, which has been boosted for UK investors by the fall in the pound. Last year, the oil major rewarded shareholders with a full-year dividend of $1.88 per share (paid quarterly), which at the current share price equates to a dividend yield of a high 5.6%. And with earnings up, the dividend now looks considerably more sustainable than it has in recent years when coverage was low.

It’s worth noting that rewarding shareholders with a dividend is a high priority for Shell and the group has not cut its dividend since the Second World War, which is a phenomenal achievement. On the downside, it’s not ideal that we haven’t seen any dividend growth in the last few years, however, I wouldn’t rule out a hike in the payout in coming years if oil prices remain buoyant, as rival BP has just lifted its quarterly dividend by 2.5%.

Reasonable valuation

Over the last three months, City analysts have upgraded their earnings estimates for Shell, and the consensus earnings estimate for FY2018 is now $2.80. That places the stock on a forward-looking P/E of 11.9, which doesn’t look overly expensive, in my view. To put that number in perspective, BP trades on a ratio of 12.8 times this year’s forecast earnings and the median FTSE 100 forward P/E ratio is 13.8, so Shell shares appear to offer value in relative terms. It’s also worth noting that the share price has pulled back around 10% since it hit a new all-time high in May.

While I rated Shell as a ‘hold’ back in June, I am starting to see a little more value emerge with the share price pulling back a little. I wouldn’t call the stock a ‘strong buy’ at current levels after the impressive run it’s had, but I think it could be worth a closer look on any near-term dips. 

Buy-And-Hold Investing

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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. 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.