Dear PGM Capital Blog readers,
In this part 2 of our blog article, entitled “Why Investing in Royal Dutch Shell might be so lucrative”, we want to elaborate further on the company’s fundamentals, for which we believe that it might be a good investment for those investors, who are seeking growth, with a high dividend yield at a low risk.
INTRODUCTION:
Anglo-Dutch, Royal Dutch Shell (RDSA.AS or RDSA.L or NYSE: RDS.A) offers a unique opportunity to invest in a company within a sector that is been beaten down in Q4-2105 and since January of this year is in an upswing.
Royal Dutch Shell has significant international exposure and a company that is committed to maintaining the single largest dividend payment in the MSCI World Index.
The company is in a position to grow it Free Cash Flow by dialing back capex without posing a threat to production. Furthermore, the company’s stable 6.6% yield is increasingly attractive to investors faced with European & Japan interest rates dipping into negative territory and U.S. Treasury rates dipping to their lowest level in history.
The company has a solid balance sheet, and it has no serious near-term liquidity risks and due to its merger with BG is applying very successful the four financial levers in managing the current fall in oil prices as can be seen from below chart.
Source: Shell
As can be seen from below charts the company’s stock remains down more than a third from its 2014 highs prior to the global oil market collapse, but it has bounced nearly 50% off of its January lows when oil dipped below US$30 per barrel.
PGM CAPITAL ANALYSIS & COMMENTS:
Based on the above mentioned fundamentals and below listed points, we have since January of this year a STRONG BUY rating on the stock of Royal Dutch Shell.
- The company hasn’t cut its dividend a single time in the past 70 years, for which its biggest advantage over its peers is its nearly 7 percent dividend yield.
- However, despite the company giving no indication that it plans on cutting its dividend, the market seems to be pricing in a significant reduction in Shell’s dividend based on the stock’s yield prior to the downturn in the 4.75% to 5.5% range.
- Skeptical investors have questioned the acquisition of BG Group and worried that the company has painted itself into a corner where it will have to choose between cutting the dividend and cutting production. However, management of the company is addressing those concerns by planning to sell US$30 billion in assets by the end of 2018 while maintaining current production levels.
- There’s no question its balance sheet has been stretched incredibly thin during the oil downturn.
- The company compounded its budget woes with its US$53 billion acquisition of BG Group as well.
- Following the addition of BG Group, Shell’s management announced it expects about US$2 billion per year in cost synergies from the merger. In addition, in its annual report, the company projected US$3 billion in total cost savings in 2017.
As can be seen from below chart, regarding the estimated; Sales, Operating Profit, Net Income and margins, for 2016 up to 2020, we can conclude that the worst is over for the company.
The company will report earnings of the fiscal Quarter ending June 30, 2016, on coming Thursday, July 28 before market open, the general analyst consensus EPS forecast for the quarter is US$ 0.52 per share.
It is also worth mentioning that US Investment bank Goldman Sachs, in March of this year has placed Royal Dutch on their Conviction Buy List and sees a thirty one percent upside for the shares of the company.
Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that commodities prices and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.
Yours sincerely,
Eric Panneflek