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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.

Income star tips Shell to yield 20% over two years

Chris White, Premier Asset Management’s head of UK equities, argues a reversal in oil sentiment could push Shell (RDSb) to yield the best part of 20% over the next two years.

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%.

6 comments so far. Why not have your say?

Keith Cobby

Mar 02, 2016 at 09:21

What good is a big dividend yield if the income ultimately eats the capital.

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Mark Stringer

Mar 02, 2016 at 10:27

Keith Cobby, excellent point and one I've often wondered about when these income portfolios are being touted.

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Norman E

Mar 02, 2016 at 16:15

The point is that the current low oil price is driven by overproduction. The saudis started it to force down the price and hurt the US frackers, Iran, and Russia. It has done so, but it also hurts the Saudis who are running a big budget deficit whist the price is so low, they actually need about $70 abarrel to eliminate the deficit, as theirs is essentially a single product economy. Sooner or later, and probably sooner the Saudis have to cut production modestly, to get the price up a bit. $50 would reduce their deficit, but would still probably keep a lot of frackers out of the market.

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Mar 02, 2016 at 17:10

Keith and Mark, I am retired and I use my ISA portfolio to supplemented my pension income to the tune of 30% this FY. As such it acts as my personal annuity but I have visibility of the contributors to the income arising and the income is tax free. That makes me interested in dividends. I am also happy to accept share price volatility as I have a diverse portfolio, no pressing need for liquidation and I can afford to run the investments unless I feel a company has real problems and dividend cuts become a habit. Unlike an annuity, even if my capital is eroded I will still have some to pass on to my heirs. I am certainly not rich but as it happens, the higher tax threshold has been stagnant for so long that the 40% pension relief I got back for my limited SIPP investments is being taken by the tax man any way.

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Steve Dick

Mar 02, 2016 at 17:12

Of course you are right Norman, the Saudis are hurting but let's not forget the Arab psyche; they cannot be seen to lose face at any price. So a stealth reduction in production will be the order of the day in my opinion. Let's see what the forthcoming discussions with world oil leaders delivers. Remember the adage: "Never Sell Shell". I certainly won't be; in fact I'm buying on the dips each time

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Mar 02, 2016 at 22:44

20% would just about recoup my losses on Shell. So let's hope this fellow is right.

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