Can Royal Dutch Shell Outperform Exxon Mobil?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), the FTSE 250, and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies with their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at oil and gas supermajors Royal Dutch Shell (RDSB) (RDS.B), which is the largest company on the London Stock Exchange, and U.S. giant ExxonMobil (XOM 0.39%), which is the world's largest listed oil and gas company. All data is sourced from Morningstar, Reuters, and company reports.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, Shell, or Exxon?

Shell looks better value based on these metrics, especially in terms of its lower price-to-book and price-to-sales ratios. Shell's P/E ratio is lower, too, but in fairness I should highlight another statistic that isn't included in the table -- price to free cash flow (P/FCF). Free cash flow is quite different from earnings, as it reflects genuine surplus cash accumulated from operations and investing, rather than just paper profits, which can be manipulated.

Shell has a P/FCF ratio of 65.6, nearly double ExxonMobil's P/FCF of 37.0. This suggests that Exxon's modestly higher P/E, P/B, and P/S ratios may be justified -- if a business generates more free cash, then it may be worth paying a little more to own it.

Yet I think Shell just has an edge as a value share. Shell's valuation offers more potential upside if the company can improve its free cash flow generation, whereas Exxon's higher valuation may be fully justified, but it leaves less room for further gains in the near term.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Shell and Exxon compare in terms of income?

Shell takes a clear lead in the income stakes, offering nearly double the forward yield provided by ExxonMobil. The reason is simple -- Shell pays out a much higher proportion of its earnings as dividends than Exxon. Over the past 12 months, Shell has paid out 40% of earnings as dividends, while Exxon has paid out 22%. On the downside, Shell's higher payout ratio means its scope for dividend growth is more limited, which is reflected in its lower historical growth rate.

Of course, whether these high payouts represent the best use of Shell's cash is a matter of opinion. As a Shell shareholder who values income, I am fairly happy with the situation, but I can't help wondering whether the company should be leaving itself a little more headroom for future dividend growth and capital expenditure. If Shell's forecast of a prolonged period of high oil prices proves correct, there won't be a problem. However, if it's wrong, the dividend would become hard to afford without resorting to reserves or debt, as has happened in some previous years.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation, if they are to protect their market share and profit margins.

How do Shell and Exxon shape up in terms of growth?

Shell and Exxon have delivered similar rates of earnings growth over the past five years, with Shell edging ahead in terms of revenue growth. Interestingly, both companies have very similar annual revenues, but Exxon's profits -- and operating margin -- are higher than Shell's, highlighting its greater profitability.

Although Exxon's share price performance over the past five years has been worse than Shell's, when looked at over a slightly longer period, it becomes apparent that Shell has underperformed Exxon in terms of share price growth. Since 2005, Exxon's share price has risen by 150%, more than three times the 45% gain Shell shareholders have enjoyed.

When dividends are factored in, Exxon is also the winner -- its 10-year average trailing total return of 11.7% is nearly double Shell's equivalent of 6.9%.

Should you buy Shell or Exxon?
For value and income, I would continue to choose Shell, thanks to its lower valuation and consistently higher dividend yield.

When it comes to growth, Exxon looks like a clear winner, with a history of delivering higher profit margins and greater total returns than its Anglo-Dutch competitor.

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