View the article online at http://citywire.co.uk/money/article/a883588
Income star tips Shell to yield 20% over two years
Citywire AAA-rated Chris White says that 'the market is wrong' to challenge the sustainability of the oil major's dividend policy.
Although the Citywire AAA-rated manager of the Premier Monthly Income fund is wary of jumping the gun on calling the bottom of the oil price, he does believe the end is in sight.
‘Oil price weakness could continue for another couple of months,’ said White. ‘However, it is a supply problem rather than a demand one. Saudi Arabia and the Opec nations will eventually get their act together and reduce supply, and the price will probably start to recover in the second half of this year,' he said.
While admitting that the price could slide further, ultimately White sees it recovering once oil production is constrained.
‘Market equilibrium should be restored, and if this happens, we will see a very sharp bounce in the oil price. If all the producers tighten supply by 2%, then the oil price will rocket – along with the share price,’ he said.
‘Considering all the shorts in under-pressure oil companies, why shouldn’t the oil price move like a share price when good news comes out? All the shorts would get closed, and the price would move up remarkably fast – as much as $10 in a day and $15 in two.’
While White (pictured) admits that Shell and BP (BP), which represent Premier Monthly Income weightings of 5% and 2% respectively, have both suffered more damage than he initially expected, he remains confident on their future prospects, particularly Shell’s.
‘The market is challenging my assumption that Shell will maintain its dividend,’ he said, referring to fears the oil major may be on the brink of its first cut since 1945. ‘The market is wrong.’
‘I have been a little bit surprised by how much BP and Shell share prices have fallen. I thought they would have been held up by their dividend yield – I wasn’t expecting Shell to drop this far.
‘But [the speculation] has been overdone. My core belief is that Shell will keep its dividend yield for the rest of the year, and there is a reasonable chance that it will next year as well. If that is the case, then Shell shares are cheap and will yield the best part of 20% over the next two years.’In the 12 months to 31 December, Premier Monthly returned 9.5% versus a UK Equity Income average of 6.46%, while in the five years to December-end the performance was 66.6% versus the peer group’s 56.8%.
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