I’d happily sell Royal Dutch Shell to buy this FTSE 100 growth stock

Take a look at a FTSE 100 (INDEXFTSE: UKX) growth share with better investment prospects than Royal Dutch Shell plc (LON: RDSB).

| More on:

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.

Investor appetite for Royal Dutch Shell (LSE: RDSB) has continued to march higher in the early knockings of quarter two thanks to fears of oil supply disruptions in the Middle East.

Heightened tensions over military action in Syria have continued to propel the Brent benchmark beyond the $70 per barrel landmark, the indicator hitting fresh two-and-a-half-year peaks around $72 earlier in Tuesday’s session.

I remain less than enthused by big energy players like Shell, however, as well as the potential for colossal near-term dividends (yields stand at 5.5% and 5.6% for 2018 and 2019 respectively). I have alluded previously to the massive output hikes over in the US but this is only part of the problem as rising fossil fuel investment in other markets like Canada and Brazil look likely to keep stockpiles close to overflowing long into the future.

City analysts are expecting Shell to report earnings growth of 56% in 2018 and 9% in 2019, but I see the potential for further bottom line expansion as likely to become increasingly difficult as supply growth looks set to outpace that of global demand.

And so these huge dividend yields, as well as a prospective P/E ratio of 14 times, appeals little to me at the moment.

Transatlantic titan

In fact, I’d be pretty content to sell out of Shell in order to buy another brilliant Footsie-quoted share — Ashtead Group (LSE: AHT).

The profits outlook for the oil giant is far from assured given the prospect of surging production from North and South America. Conversely, the earnings picture for Ashtead is much more secure as its busy M&A programme helps sales momentum to click through the gears.

In the quarter to January the power equipment provider saw rental revenues rise to £845.5m, up 24% year-on-year. This marks an obvious improvement in recent months given that rental turnover had risen 21% for the nine months ending January.

Ashtead forked out £315m on acquisitions during May-January, up from £196m in the corresponding period last year. It also chalked up an £859m capital expenditure bill in the period. The business’s formidable cash generation means it should remain well placed to keep investing in its operations in order to capitalise on the favourable trading environment, particularly in North America.

Revenues at its Sunbelt division across the Atlantic boomed 18% in the last quarter to $3.12bn and, with the economy Stateside going from strength to strength City analysts expect solid earnings growth of 25% and 21% in the years to April 2018 and 2019 respectively.

Ashtead has lifted dividends at a compound annual growth rate of 29.7% during the past five years and, with profits expected to keep on booming, it comes as little surprise that further generous hikes are anticipated. Last year’s 27.5p per share payment is predicted to advance to 32.8p in the present period and again to 37.8p in fiscal 2019, resulting in handy-if-unspectacular yields of 1.6% and 1.8% for these respective forward periods.

At current prices Ashtead changes hands on a forward P/E ratio of 15.9 times. In my opinion this is far too cheap given the strong possibility of sustained profits and dividend expansion.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »