Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).
Valuation
So let’s start with the basics, Shell’s valuation in relation to its close peers and the wider sector.
Shell currently trades at a historic P/E of 8, which is significantly below the oil & gas producers sector average P/E of 13.1. What’s more, close peers BP (LSE: BP) and BG Group (LSE: BG) trade at historic P/Es of 12.8 and 15.5 respectively.
Shell’s low valuation in comparison to both its close peers and the wider makes the company look cheap. However, in my opinion Shell does not deserve this low valuation. As the largest oil & gas producer listed in London, Shell should trade at a premium to its sector peers, for no other reason than the company has a huge influence over the oil & gas industry.
Company’s performance
That said, City analysts expect Shell’s earnings growth to lag that of both its close peers for the next two years. In particular, City forecasts current predict that Shell’s earnings per share will decline 9% during the next two years.
Meanwhile, BP’s earnings per share are expected to expand 15% during the next two years and BG Group’s earnings are predicted to grow 10% during the same period.
Still, Shell is currently in the midst of an asset disposal program aimed at improving profit margins and selling off unprofitable assets. The company also has numerous multi-billion dollar projects set to come online during the next few years, which could change analysts’ opinions.
Dividends
When it comes to dividends, Shell is king. The company has maintained its dividend payout for more than half a century and currently, Shell supports a 5% dividend yield. That said, City analysts are only projecting payout growth of 8% for Shell during the next two years.
Unfortunately, this rate of growth lags that of BP, which is expected to increase its payout 18% during the next two years. However, BP only currently supports a dividend yield of 4.4%.
BG Group really lags the group with a dividend yield of only 1.3%.
Foolish summary
So overall, Shell looks cheaper than both it close peers and the wider sector. What’s more, the company supports one of the largest dividend yields in its sector.
Still, Shell’s earnings growth is expected to be lacklustre during the next few years, which means that for investors seeking growth, better opportunities can be found elsewhere.
Nonetheless, I feel that Shell is a much stronger share that its peers due to the company’s size.
