Shares in Royal Dutch Shell (LSE: RDSA) (LSE: RDSB) have fallen by 30% in the last year and this has left many of the company’s investors wondering if they have made a mistake in purchasing shares in the oil major. After all, there are a number of other stocks and sectors that have posted strong returns during the same time period, meaning that the opportunity cost of investing in Shell has been high.
Looking ahead, though, Shell could prove to be a surprisingly strong performer. Certainly, there is the scope for a rising oil price over the medium to long term, since the current level appears to be somewhat unsustainable. But, even if Shell does not benefit from more positive pricing conditions, it appears to have the potential to rise by 44% to £25 per share.
A key reason behind this is Shell’s strategic advantage over many of its sector peers. For example, Shell has superb cash flow, a very strong balance sheet and the strategy to improve its position on a relative basis. In other words, it looks set to come through the present difficulties in a better position compared to its peers, with Shell taking the opportunity of low asset prices to make acquisitions and also to restructure its business so as to focus on the most profitable and higher growth areas.
This strategy appears to be working well. Shell is forecast to grow its bottom line by an impressive 19% next year, which is around three times the expected growth rate of the wider index. And, with Shell trading on a price to earnings (P/E) ratio of just 13.2, it equates to a price to earnings growth (PEG) ratio of just 0.7. This indicates that Shell offers growth at a very appealing price. In fact, if Shell were to trade at £25 per share, it would have a forward P/E ratio of just 15.9 which, for a dominant oil stock, seems to be a very fair price to pay.
Furthermore, Shell also has excellent income prospects. Due to a combination of its share price fall and a focus on maintaining dividend payments, Shell now yields a whopping 7%. And, best of all for its investors, Shell is expected to increase dividends next year, with them being forecast to be covered 1.3 times by profit. This shows that they are sustainable at their current level and that, over the medium term, there is scope for an increase in Shell’s shareholder payouts.
Moreover, if Shell were to trade at £25 per share, it would still yield an impressive 4.8%. This would keep it towards the top end of the FTSE 100’s income leaderboard and maintain demand for its shares among income-seeking investors. As a result, a share price of £25 really does not appear to be overly generous or difficult to achieve over the medium term. Certainly, investor sentiment may be weak at the present time but, for long term investors, it represents the perfect time to buy a slice of Shell.