At the end of January, it looked as if investors had given up on Royal Dutch Shell (LSE: RDSB). Its share price had plunged to a multi-year low of 1,277p and City analysts were advising their clients to avoid the company. What’s more, the consensus seemed to be that during 2016 Shell would be forced to cut its dividend for the first time since the Second World War.
However, 20 January was a low point for the company and since then Shell’s shares have rallied by 33%, that’s excluding the first quarter dividend payment of 33p per share.
Investors who bought at the end of January are now sitting on a healthy profit. The question is, how much longer will this rally continue?
Renewed confidence
At the end of January, the market was worried about Shell’s ability to maintain its dividend payout amid the volatile oil environment and many investors were concerned about the company’s deal to buy BG Group.
Two months on and these concerns seem to have evaporated. Shell has completed its merger with BG and is now setting about integrating the two companies. Buyers have been sounded out for asset sales, and Shell is already restructuring the enlarged group’s workforce.
Moreover, Shell’s management has made it quite clear that the company’s dividend payout is here to stay, despite the low oil price. The company has a relatively clean balance sheet and is still making significant profits from its downstream and trading operations, profits that will be used to fund the dividend for the time being. Asset sales will also boost Shell’s liquidity.
Hard to value
Investors have begun to trust Shell again now that the company is making steady progress with the BG integration and the sustainability of the dividend. Still, Shell’s shares remain difficult to value, and it’s hard to say whether or not the shares are overvalued or undervalued at present levels.
You see, based on current oil prices Shell is trading at a forward P/E of 22.5, a premium multiple usually reserved for high-growth tech companies. However, the new enlarged Shell is set to have a record year this year regarding output and volume of hydrocarbon products traded. But because oil prices are depressed this won’t be reflected on the firm’s income statement.
So, for the time being one of the simplest ways to value shares in Shell, without guessing where the price of oil will be 12 months from now, is to look at the company’s dividend yield.
And at present levels, Shell’s shares support a dividend yield of 7.6%. As covered above, management is set on keeping this yield in place for the foreseeable future. In today’s low-interest-rate world, that 7.6% looks highly attractive.
It looks as if there is still time to buy Shell.
