Shares in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) have surged 7% higher since the firm’s first-quarter results were published on 30 April.
Investors liked the firm’s 4% dividend hike, and were also impressed by its $1.2bn first-quarter share buyback — but what’s the longer-term picture like for Shell?
In this article, I’ve taken a look at three figures I believe highlight the risks and benefits of investing in Shell.
1. 30%
Elephants may not gallop, but Shell has outperformed the FTSE 100 by 30% over the last ten years.
Admittedly some of this outperformance is probably due to the catastrophic share price collapses endured by several of the FTSE’s banking constituents, but it’s still an impressive performance.
It’s also worth commenting on the contribution Shell’s high-yielding dividend made to this performance: over the last three years, during which Shell has been widely criticised for its performance, Shell has delivered an average total return of 10.3% per year, 1.8% higher than the FTSE 100 average of 8.5%.
2. 0%
However, its’ not all good: since 2008, Shell’s turnover has grown at a compound average rate of just 0.4% — effectively nothing. Worse still is that over the same period, Shell’s normalised earnings per share have fallen by an average of 8.5% per year.
All of this highlights a worrying trend in the oil and gas industry; despite years of consistently high prices, these businesses have failed to deliver a corresponding increase in profitability, due to the increasing costs of finding and extracting oil and gas.
3. 8.3%
Using a dividend discount model, a widely-used valuation technique for mature, dividend-paying stocks, my calculations suggest that Shell could deliver an average annual total return of 8.3% over the medium term, assuming its dividend grows at an average of around 4% per year.
This performance would be in-line with Shell’s 10-year trailing average total return of 8.7%, so looks realistic, if unspectacular.
Is Shell still a buy?
Shell’s share price has risen by 12% so far this year. The oil giant’s shares aren’t quite the bargain they were at the end of 2013, and the prospective yield on offer has fallen from 4.9%, to a more modest 4.4%.
I still think Shell is a good income buy, but if you are looking for a better balance between income and capital growth, then I believe there are better options elsewhere.