Should I Invest In Royal Dutch Shell?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per year since Jan. 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So, this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at Royal Dutch Shell  (LSE: RDSB  ) (NYSE: RDS-B  ) , which describes itself as a global group of energy and petrochemicals companies. People often refer to the firm as an oil major.

With the shares at 2,153 pence, Shell's market cap. is 56,425 million pounds.

This table summarizes the firm's recent financial record:

Year to December

2008

2009

2010

2011

2012

Revenue ($m)

458,361

278,188

368,056

470,171

467,153

Net cash from operations ($m)

43,918

21,488

27,350

36,771

46,140

Adjusted earnings per share

509

160

304

461

432

Dividend per share

160

168

168

168

172

Judging by these figures, Shell is showing the cyclical nature of its business. Most indicators have been growing since their lows in the table, but over the whole period, performance has been broadly flat.

Nevertheless, Shell has a growth agenda and expects around 30 major projects, currently at various stages of completion, to advance financial and production growth by adding about 7 billion barrels of oil or gas equivalents. The company thinks that upstream activity could add some $15 billion of cash flow by 2015, if the oil price holds at about $100 per barrel.

A scoot around Shell's website reveals that, at the end of 2012, the firm had 12.4 billion barrels of oil equivalent (BBOE) of resources on stream, averaging 3.4 million barrels of oil equivalent per day (MBOE/D) of production. It expects that production figure to rise to about four MBOE/D by 2017/2018, thanks to around 20 BBOE of resources potential in its development funnel, which the company says averages out to about 26 years' worth of current production.

However, I think the total-return potential for investors is uncertain as much could depend on the vagaries of oil and gas prices and general macroeconomic conditions.

Royal Dutch Shell's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

  1. Dividend cover: Adjusted earnings covered the last dividend two-and-a-half times. 4/5
  2. Borrowings: Net gearing is around 10%, with net borrowings about 40% of earnings. 4/5
  3. Growth: All of revenue, earnings, and cash flow have been growing from a cyclical low. 3/5
  4. Price to earnings: A forward eight looks fair compared to growth and yield forecasts. 2/5
  5. Outlook: Satisfactory recent trading and an optimistic outlook. 3/5

Overall, I score Shell 16 out of 25, which inclines me to be cautious about the firm's potential to outpace the wider market's total return going forward.

Foolish summary
Earnings cover the dividend quite well and borrowing seems under control. There is an element of cyclicality in the figures and forecasts for growth; recent trading and a mild outlook statement all lack the conviction to reassure me sufficiently about the firm's prospects. I'm not going to invest in Royal Dutch Shell right now.

That said, forecasters expect Shell's dividend yield to be around 5.4%, but how fast can that dividend grow? I'm more certain about another idea from The Motley Fool's top value investor, who has discovered what he believes is the best income-generating share play for 2013. He sets out his three-point investing thesis in a report called "The Motley Fool's Top Income Share For 2013," which I recommend you download now. For a limited time, the report is free so, to download it immediately and discover the identity of this dividend-generating star, click here.

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