In this series, some of your favorite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.
In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.
Stepping into the ring today are oil heavyweights Royal Dutch Shell
Fears about slowing growth in China and ongoing eurozone worries have seen the shares of natural resources companies -- such as miners and oil and gas producers -- underperform the wider market by some margin over the last six months.
The FTSE 100 has moved 4% lower but BP has dropped 16%, in line with many of its peers. Shell, however, has bucked the trend with a mere 2% decline.
Let's take our seats at ringside.
Round 1: earnings
|
|
Shell |
BP |
|---|---|---|
| Recent share price | 2,256p | 424p |
| Last year price-to-earnings (P/E) ratio | 7.8 | 5.0 |
| Current year forecast P/E | 8.4 | 7.2 |
| Four-year average earnings per share (eps) growth (%) | 12 | (4) |
| Current year forecast eps growth (%) | (7) | (31) |
| Forecast operating margin (%) | 9 | 7 |
Source: Digital Look. Winners in bold.
BP scores points for an ultra-low P/E, but Shell just edges the first round for its faster historic earnings growth, less precipitous forecast earnings decline for the current year and a modestly superior operating margin.
BP's historic earnings growth is tainted by the Deepwater Horizon drilling rig explosion of 2010, the legacy of which is likely to last for many years. BP has made provision for costs it can accurately estimate, but when liabilities rise above $20 billion they will start to go through the income statement, reducing earnings in each period they are charged.
The company notes that: "The total amounts that will ultimately be paid by BP in relation to all obligations relating to the incident are subject to significant uncertainty."
Round 2: dividends
|
|
Shell |
BP |
|---|---|---|
| Last year dividend yield (%) | 4.6 | 4.3 |
| Current year forecast dividend yield (%) | 4.9 | 4.6 |
| Four-year average dividend growth (%) | 7 | (15) |
| Current year forecast dividend growth (%) | 7 | 7 |
| Forecast dividend cover | 2.4 | 2.9 |
Source: Digital Look. Winners in bold.
Again, Shell comes out on top in the second round. It has a superior yield and historic dividend growth, and shares the point with BP on forecast growth.
As with BP's historic earnings growth rate, its dividend growth rate has been affected by the Deepwater Horizon disaster. The company was obliged to suspend its dividend initially, and then rebased it at a lower level. This cautious cutback continues to reverberate, enabling BP to win a point outright for superior dividend cover.
Round 3: balance sheet
|
|
Shell |
BP |
|---|---|---|
| Price-to-book (P/B) ratio | 1.3 | 1.1 |
| Net gearing (%) | 15 | 27 |
Source: Digital Look. Winners in bold.
The companies share the points in the final round giving Shell an overall victory, having won two rounds and drawn one. Shell takes seven points, BP four, and one point is shared.
Post-match assessment
This was a fairly comfortable win for Shell. Both companies are on P/Es well below the market average making the oil and gas industry -- certainly at the supermajors level -- one of the most unloved sectors in the market.
Shell has delivered earnings and dividend growth comfortably above inflation. However, we should note that the dividend growth in the table is in sterling terms and that the dividend has been flat for the past three years in the company's reporting currency of dollars. Nevertheless, with good dividend cover and modest gearing to boot, Shell looks to me to be attractively valued at present for investors who can look beyond six months ahead.
Meanwhile, BP is a riskier proposition and one whose future earnings are likely to be crimped from time to time, to an unknown degree, as the after-effects of its oil spill rumble on.
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