Is Royal Dutch Shell Plc Still A Buy At Record Highs?

Royal Dutch Shell Plc (LON:RDSB) has thrashed the FTSE 100 this year. Can the oil and gas giant hold on to its recent gains?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

royal dutch shellRoyal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has been on a tear this year, climbing 10% while the FTSE 100 — in which Shell is the largest company — has slipped back 1% since January.

Interestingly, this means that Shell shares are now trading very close to their all-time high — so are they still a buy?

Face value

Current consensus forecasts suggest that Shell will report adjusted earnings per share of $3.65 this year, which equates to around 220p, placing the oil giant’s shares on a fairly modest 2014 forecast P/E of 11.5.

Should you invest £1,000 in Cranswick right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Cranswick made the list?

See the 6 stocks

Similarly, Shell’s prospective yield of 4.5% should be enough to tempt most income seekers.

However, relying solely on analysts’ guesses for the year ahead is not a recipe for riches. In Shell’s case, I believe we need to look backwards in time, as well as forwards.

Rollercoaster ride

Anyone who has followed oil stocks for a few years will know that, despite their size and stable production, oil firms’ earnings per share can vary wildly, from one year to the next.

The price of oil, project timings and divestments can all make for surprisingly volatile earnings.

To see what I mean, take a look at Shell’s reported earnings per share over the last ten years:

Year 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Reported earnings per share $2.60 $4.26 $4.96 $3.28 $2.04 $4.27 $5.00 $3.97 $3.79 $2.74

Source: Shell company accounts.

Shell’s earnings average out at $3.69 per share over the last ten years, which is broadly in-line with consensus forecasts for 2014 ($3.65) and 2015 ($3.72).

This gives Shell a PE10 (P/E using 10-year average eps) of around 11.5. The PE10 can be a useful guide to a company’s current valuation, and in Shell’s case, it suggests to me that the shares are valued about right — slightly below the FTSE average, reflecting Shell’s focus on dividend returns, rather than outright growth.

What’s next for Shell?

I have a suspicion that Shell’s earnings may peak in 2015 or 2016, and that today’s share price could look relatively expensive in a couple of years’ time.

Firstly, there’s no guarantee that $100+ oil will last forever. Secondly, Shell’s current $15bn divestment programme, which is proving very popular with investors, is due to complete in 2015.

Profits from divestments — such as the recent $5bn gain from the sale of shares in Australian firm Woodside Petroleum — will boost Shell’s reported earnings this year and next, but will drop out of the firm’s profits in 2016.

Shell’s 4.5% yield is enough to make it a sensible income buy, but I don’t think the firm’s share price is likely to rise much further, given its recent outperformance. 

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Shell. The Motley Fool has no position in any of the shares mentioned.

More on Investing Articles

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »

Investing Articles

2 stocks that could help investors earn £2,516 of passive income per year from a £20k ISA

Our writer selects two high-yield UK dividend shares for investors to consider that could turbocharge a passive income portfolio.

Read more »