There is no shortage of attractive income investments in the FTSE 100, but I believe that there is one company that could be a better dividend buy for your portfolio than any other share in the UK’s leading stock index.
Almost every company in the FTSE 100 offers investors a dividend. However, few companies qualify for the elite club of dividend aristocrats — firm’s that have raised their dividends at least once per year for 25 years or more. These strict criteria mean that dividend aristocrats are rare and any stock that can achieve this record, instantly makes it into the dividend hall of fame.
Royal Dutch Shell (LSE: RDSB) does not, technically, qualify as a dividend aristocrat. The company hasn’t cut its dividend since the Second World War although it has frozen the payout.
Since 2014, the dividend has been frozen at a rate of $0.47 per share per quarter. Nevertheless, while the company’s nominal dividend has been frozen, for UK investors the actual amount received has increased thanks to the falling value of sterling.
According to my figures, Shell’s per share dividend has totalled $1.88 per annum since 2014, but UK investors received a total of 118.5p in 2014, 125.5p in 2015, 144.05p in 2016 and finally 142.33p for 2017. Based on these numbers, the annual dividend distributed to UK shareholders has increased by around 5% per annum since 2014.
Looking at these numbers, I reckon Shell could qualify as a dividend aristocrat even though it does not technically meet the exact qualifications.
Looking to the future
A company’s history can only tell us so much about its future potential. What really matters is the business’s current fundamentals, and Shell’s are strong.
The business is a huge cash cow. After spending the last four years disposing of non-core assets, slashing costs and improving the efficiency of its operations, I believe the company is more attractive as an investment today than it has been for many years.
Shell’s operating profit margin is an excellent guide to how much the business has changed since 2014. On a trailing 12-month basis, the company has reported an average operating profit margin of 7.2%, during this period, the price of Brent crude has averaged around $65 a barrel. In comparison, throughout 2012 and 2013, when the price of oil traded higher than $100 a barrel, Shell’s operating profit margin averaged 7%.
The above figures show that thanks to management efforts to restructure the business over the past four years, Shell is almost as profitable today as it was in 2013, even though the price of oil is more than 40% lower (based on those trailing 12-month figures).
And looking at the group’s expanding margins, it is no surprise that the City expects Shell’s earnings per share (EPS) to leap 41% for 2018, followed by growth of 16% for 2019. Based on these estimates, the shares are trading at a forward P/E of 10.7 and support a dividend yield of 5.8%.
With earnings growth set to explode, dividend growth should follow, and that’s why I think now could be the time to buy this income champion.
Rupert Hargreaves owns shares in Royal Dutch Shell B. 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.