2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) still offer good value, after five years of market gains.
Back to basics
Of course, as Shell shareholders will know, the FTSE 100’s largest company has failed to take part in this year’s rally — its share price is currently within 0.5% of its January opening price, and it has also lagged the FTSE over the last five years, climbing just 26% since December 2008.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Shell, we need to look at the value that’s on offer today, and consider whether Shell’s incoming CEO, Ben van Beurden, could also herald a new era of rising returns and improved focus for Shell:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 10.4 |
| Trailing dividend yield | 5.0% |
| Operating margin | 8.0% |
| Net gearing | 12.6% |
| Price to book ratio | 2.4 |
Shell’s current share price provides an undemanding valuation and a high yield, which along with the firm’s low levels of debt, make it an appealing choice for institutions and individuals needing a reliable income. It’s a clear buy, in my view.
Will Shell cut spending in 2014?
Shell has been criticised for its failure to control its capital expenditure, which is expected to rise from a planned $40bn to $45bn in the current year. However, there are signs that the firm is finally starting to prioritise more profitable projects and drop others — last week, Shell announced that it wouldn’t pursue a US gas-to-liquids project in Louisiana, due to uncertainties over costs and likely returns.
A company as big as Shell cannot change direction quickly, but consensus forecasts for 2014 suggest that analysts expect to see a decent level of earnings growth:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 9.1 |
| Dividend yield | 5.2% |
| Earnings growth | 11% |
| P/E to earnings growth (PEG) | 1.0 |
I agree that Shell has its problems, but I believe they are more than factored into the company’s valuation, and that at today’s price of 2,155p, Shell’s shares offer great value and are a clear buy.