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Shell’s 5% Dividend Yield (Part 3): Total Return Story is Compelling

There’s no sugarcoating that Royal Dutch Shell (RDS.B) has been sputtering of late, compared to Exxon (XOM) and Chevron (CVX).

RDS.B Chart

RDS.B data by YCharts

But there are about 25 billion reasons to suggest this isn’t some apocalyptic moment.

RDS.B Net Income TTM Chart

RDS.B Net Income TTM data by YCharts

But nor is it a slam dunk. Right now Shell’s 8.2 PE ratio makes it look like a screaming deal, when stacked up against the 13 PE for the S&P 500.

But it’s not really all that cheap. Other than the recession-induced spike when earnings were slammed, Shell consistently sells at a sub-10 PE.

And as explained earlier, Shell is going to be spending a bunch of money the next few years putting the pieces together for its next big production surge. That doesn’t suggest a lot of organic earnings growth.

A spike in oil and gas prices would sure help on the earnings front, and we’re always just one international incident away from that happening. But based on pure demand, no one is expecting oil prices to jump in the next few years.

So Shell’s a bit of a value trap? Quite possibly. But there’s the matter of that 5% dividend yield to consider. In a world where Treasuries and high -grade corporate bonds yield 1.5%-2.5%, there are worse traps than being paid 5% for your patience.

And as disappointing as 2012 performance has been, over the past five years Shell’s dividend yield -- which hasn’t dipped under 4% since 2009 -- has helped it generate a better total return than Exxon-Mobil (2.6% current yield) and the S&P 500 index (2% dividend yield).

RDS.B PE Ratio TTM Chart

RDS.B PE Ratio TTM data by YCharts

That said, Shell gets only a middling grade for its dividend growth. It only recently raised its dividend after a three-year hiatus.

RDS.B Dividend Chart

RDS.B Dividend data by YCharts

Still, over a fuller five-year stretch, its dividend has risen at more than double the rate of inflation. And with more than $18 billion in cash and a dividend payout ratio below 20% the dividend seems plenty secure.

If you’re an income investor in search of yield, Royal Dutch Shell is a compelling alternative to high yield junk. And if you believe long-term there’s going to be more demand for energy resources, it’s hard to see how the second-largest integrated oil and gas company won’t eventually profit from that as well.

Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.

Read more articles about: Company Analysis  

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