Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Could This Be Why Royal Dutch Shell Trades at Just 8.7 Times Profits?

LONDON -- These days you don't have to look far to spot lowly rated shares within the FTSE 100.

With a market value of £138 billion, Royal Dutch Shell  (LSE: RDSB  ) (NYSE: RDS-B  ) is the largest constituent of the blue-chip index. Yet its £22 shares trade at about 8.7 times the underlying earnings declared last week for 2012.

A number of reasons could explain the single-digit rating. Possibilities include the group's prospects for additional production, potential price swings within energy markets and the fact that earnings last year were less than that recorded during 2007.

Another reason could be Shell's capital expenditure. The company spends vast amounts every year on plant, property and equipment, and the sums are well in excess of the associated depreciation and amortization charged against reported earnings.

Here are the figures:








Depreciation and amortization







Net capital expenditure







Source: S&P Capital IQ

You could argue Shell's report earnings are somewhat flattered by its depreciation policy.

In fact, I calculate net capital expenditure during the last six years has exceeded the reported depreciation charge by between 27% and 132%, and by an average of around 80%.

Indeed, more than $140 billion has been spent on plant, property on equipment between 2007 and 2012, of which more than $60 billion was not charged to the profit and loss account.

Of course, Shell's capital expenditure goes toward various long-term projects, so I accept the associated accounting costs are spread across the lifetime of the projects and are not expensed immediately.

But when you consider Shell's earnings were $5 per share during 2007 and were $4 a share last year, you do have to wonder about the benefits of that aforementioned $140 billion of expenditure.

Bear in mind, too, that Shell has indicated net capital expenditure will top $30 billion during each of 2013, 2014 and 2015. At some point, all this expenditure will have to propel the group's earnings higher.

Anyway, I'm a bit skeptical of Shell's reported earnings, and so it seems is the market, which is why I believe you can buy Shell's shares for less than 9 times the firm's accounting profits.

Still, those profits are funding an 114 pence per share dividend for 2013, which in turn supports a 5.2% yield. Not bad -- especially when the payout has just been lifted by nearly 5%.

However, Shell's prospects and valuation were not attractive enough to qualify the share for this exclusive in-depth report, which is devoted instead to another high-income opportunity within the FTSE 100.

In fact, this alternative opportunity offers a 5.7% income, might be worth 850p versus around 700 pence now -- and has just been declared the "Motley Fool's Top Income Stock For 2013." Simply click here to download the report -- it's 100% free.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2245894, ~/Articles/ArticleHandler.aspx, 9/25/2016 6:48:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 12:05 PM
RDSB $1953.61 Up +3.11 +0.16%
Royal Dutch Shell… CAPS Rating: No stars
RDS-B $51.07 Down -0.72 -1.39%
Royal Dutch Shell… CAPS Rating: ****