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Smart Investor: how my Shell tip has performed

On 11 February 2011 Smart Investor tipped Shell. How has the company performed since then, and is it still worthy of investment?

 
Smart Investor: how my Shell tip has performed

Smart Investor takes a look at one of his previous recommendations to see how it has performed since February of last year, and offers his verdict on whether it's still good value.

Shell: how has it performed?

On 11 February 2011, I tipped Royal Dutch Shell (RDSb.L). At the time of writing, the shares were priced at £21.35, with the FTSE 100 being at the heady heights of around 6,020 points.

Since then, Shell has performed reasonably well, with shares falling to a low of around £19.00 in August 2011 before hitting highs of around £24.90 in January 2012. The shares have fallen somewhat since and are priced at £23.10 at the time of writing.

This equates to a capital gain of £1.75 per share, which is 8.2%. Over the same period, the FTSE 100 has fallen by 65 points or 1% to 5,955. In addition, Shell has paid dividends of approximately £1.08 per share over the period, which equates to a yield of 5%.

This is slightly better than the FTSE 100 yield over the same timeframe of around 3%, meaning Shell’s total return since February 2011 is 13.2% versus a total return of 2% for the FTSE 100.

Should you continue to hold?

Of course, as regular readers will know, I am a long-term investor and one year is a short period. What I want to know after a year of holding a company is whether I should continue to hold and whether I should purchase more shares.

In terms of performance, Shell has had an impressive 12 months. Net profit has increased from £13 billion in 2010 to £20 billion in 2011 (all figures assume an exchange rate of £1 equating to $1.55), which translates into a return on equity (ROE) of 19.5%, which is very attractive. In addition, Shell’s free cash flow has also improved from £264 million in 2010 to £6.7 billion in 2011.

As highlighted in my original article on Shell, its yield attracts a substantial number of income investors. Last time around its yield was 5%, while today it is 4.7% owing to the dividend not being increased in 2011. However, this yield keeps it firmly in the top 20 FTSE 100 high yielders.

As for debt levels, these have been reduced from £28.6 billion in 2010 to £24 billion in 2011. This means the debt to equity ratio has fallen from 30% to 21.9%, which is low and makes the ROE figure appear all the more impressive.

Are the shares still good value?

Moving on to value, last time around a price-to-book ratio of 1.36 and a price-to-earnings ratio of around 10 were deemed to be ‘acceptable’. Today, the equivalent figures are better, with Shell having a price-to-book ratio of 1.31 and a price-to-earnings ratio of just 7.2 using last year’s diluted earnings-per-share figure of 320p.

Therefore, Shell remains a company which is worth buying. It has improved in all areas since it was first recommended 13 months ago, with the exception being a slightly worse dividend yield. Its return on equity, profitability and free cash flow are all higher, while debt levels are significantly lower.

In spite of its share price now being higher than it was 13 months ago, it appears to offer even better value for money and, as such, makes for a sound and logical long-term investment.

Smart Investor owns shares in Shell.

3 comments so far. Why not have your say?

dpeddlar

Mar 21, 2012 at 12:25

My biggest holding is in Shell so it was an intersting read.

Thank you for the update

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Hotrod

Mar 25, 2012 at 10:53

On the face of it, everything in the garden looks rosy. (from an accountant's point of view) However I think it would be wise for the blissful to be aware of possible pitfalls that lie ahead.

The global oil situation is highly flamable, and is vulnerable to acts of war and terrorism. The world banking crisis is far from being effectively resolved, and who knows when and where the next earthquake will occur.

Smart Investor also fails to mention that there are at least two ongoing disputes that could affect RDS financial performance. Namely: Litigation concerning compensation for oil spills in Nigeria, and the possibility of supply disruption if a strike by tanker drivers is not averted.

Stockmarkets in general have recovered well since 2007 but I am still not convinced that something nasty is not lurking round the corner, so I intend to remain in cash for a few months longer.

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Keith Snell

Mar 25, 2012 at 12:38

As a long term investment despite the possible pitfalls as oil is vital to every country it will remain a sound long term investment. The pifalls if they occur will be overcome and whilst share prices may dip from time to time they are also likely to recover. Short term investing however is a different ball game.

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