Royal Dutch Shell: buy, sell or hold?

Edward Sheldon analyses the investment case for Royal Dutch Shell plc (LON: RDSB).

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Over the last three months, Royal Dutch Shell’s (LSE: RDSB) share price has soared nearly 20%. In the last two years, the stock is up over 50%. After such a strong performance, are Shell shares worth buying now? Or, if you’re already a shareholder, is it time to sell and lock in your profits? Let’s take a look at the investment case.

Oil price surge

Before we analyse Shell’s numbers, it really is worth looking at why Shell shares have powered ahead recently. After all, the FTSE 100 is only up around 8% over the last three months. Why have Shell shares smashed the index?

The answer is that Shell’s share price has soared on the back of a strong rise in the price of oil. Over the last three months, high levels of geopolitical uncertainty have pushed the price of Brent crude oil up from around $65/bbl to $75/bbl. One key driver of the recent oil price surge has been Donald Trump’s withdrawal from the Iran nuclear deal. This has raised concerns that the global supply of oil will be squeezed as Iran is the third-largest producer in the Organisation of the Petroleum Exporting Countries (Opec), the source of around 3% of global demand. Syria conflict, Opec production cuts and the recent cold snap across the UK, Europe and the US have also contributed to oil’s recent gains.

It’s not rocket science to realise that a higher oil price is good news for a global oil giant like Shell. A higher oil price boosts revenues, cash flows and profits and could even mean higher dividends for shareholders at some point in the future. So that’s why Shell shares have outperformed the footsie recently.

As for where the oil price is headed next, that’s hard to predict. Some analysts are talking up $100/bbl oil, while others are expecting prices to ease in the second half of 2018.

Revenues and earnings boost

As a result of higher oil prices, City analysts are scrambling to upgrade their FY2018 forecasts for Shell. Analysts now expect revenue for the year to come in at $365bn, up 20% on last year. Similarly, earnings per share are expected to rise 45% to hit $2.79. It’s worth noting that this earnings estimate has been upgraded by $0.24 in the last month alone.

Valuation and dividend

Despite the earnings upgrades, Shell shares don’t look particularly expensive at present. The earnings estimate of $2.79 places the stock on a forward-looking P/E ratio of 12.7, which is far below the median FTSE 100 forward P/E of 14.6.

Shell’s dividend yield also looks extremely appealing in the current low-interest-rate environment. The oil major paid out dividends of $1.88 per share last year, which at the current share price, equates to a high yield of 5.3%. While dividend coverage has been low in recent years, the dividend now looks a lot safer with earnings on the rise.

Buy, sell or hold?

Weighing up Shell’s recent share price gains, and the stock’s valuation and yield, I rate the oil major as a ‘hold’ for now. I’d be a little hesitant about buying the stock after such a strong share price rise, yet at the same time, I don’t believe it’s time to sell Shell either.

If you’re looking for more FTSE 100 dividend stock ideas, check out the free report below. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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