Why this FTSE 250 dividend stock could rise faster than the Shell share price

This FTSE 250 (INDEXFTSE:MCX) dividend stock could soon roar ahead of Royal Dutch Shell plc (LON:RDSB), says Roland Head.

| 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.

The oil market recovery has left FTSE 100 giant Royal Dutch Shell (LSE: RDSB) trading close to record highs. Today I’m going to update my view on Shell and highlight a potential opportunity elsewhere in the offshore sector.

There’s more to come

When oil prices crashed in 2014, big producers launched urgent cost-cutting drives. The results have been impressive. For example, Shell now expects to be able to generate free cash flow of $25bn-$35bn per year at an oil price of $60 per barrel.

With Brent Crude now trading at about $76 per barrel, profits are soaring. The Anglo-Dutch group’s half-year adjusted earnings rose by 36% to $10.3bn this year.

Shell’s share price has now doubled since the start of 2016. But rising profits mean that the stock still looks reasonably priced to me, on 12 times 2018 forecast earnings and with an expected yield of 5.6%.

Looking ahead, earnings per share are expected to rise by 14% in 2019, giving a forecast P/E of just 10.5.

My view is that we’re still in the early stages of the next oil market upcycle. Even if oil prices weaken again, I see very little risk that Shell will need to cut its dividend. The firm held its payout unchanged through the recent oil price crash and is now operating with much lower costs.

I’d rate Shell stock as an income buy.

A growth opportunity

At some point, I suspect the ‘g’ word — growth — will start to appear in oil executives’ forecasts. When this happens, rapid profit growth could be slowed by rising spending, as firms invest in the next generation of oil and gas fields.

This will be the opportunity that oil services companies are waiting for. Customers such as Shell put these firms under huge pressure to reduce their rates during the downturn. In most cases, profits have not yet recovered.

One example is marine services group James Fisher & Sons (LSE: FSJ). During the first half of 2014, revenue rose by 20% in Fisher’s Offshore Oil division. Underlying operating profit climbed 32% to £11.9m.

According to figures published today, the same operations generated an underlying profit of just £1.2m during the first half of 2018. Revenue rose by just 1% during the period.

It’s clear that this group hasn’t yet seen much of a recovery in Offshore Oil. Fortunately this is only part of a much larger business, which includes shipping, offshore wind farm support and other specialist marine services.

An under-the-radar buy?

Today’s half-year results showed that James Fisher & Sons’ underlying operating profit rose by 18% to £24.5m during the six months to 30 June. Group revenue was 12% higher, at £260.5m.

When profits rise more quickly than revenue, we know that margins are improving. In this case, underlying operating margin rose from 8.9% to 9.4%. My calculations show that the group’s return on capital employed, another measure of profitability, has risen from 11.5% to 12.2% over the last six months.

I’m encouraged by this progress and attracted to the group’s broadening mix of customers.

Trading on a forecast price/earnings multiple of 20, the shares look fully priced at the moment. But in my view this could still be a good long-term dividend growth buy, with the aim of topping up on any market dips.

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 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »