UK Edition
Questor: Shell shares have risen by a fifth since we tipped them - but hold on for more
This column confesses that it cannot remember who said “you can have cheap stocks and good news, just not both at the same time”, but it certainly owes them a debt of gratitude when it comes to Royal Dutch Shell.
The news looked awful a year ago: depressed oil and gas prices, slumping profits, and cash flow so weak that questions were even being asked about the dividend, which had not been cut since at least 1945. Yet we argued that sentiment was already downbeat, the stock oversold at just under £20 and the divi fundable (for a time at least) from emergency measures that would give management time to respond.
The result is that the shares have risen by around a fifth, outpacing the FTSE 100 by some distance, and investors have banked dividends worth more than 180p on top.
This is because Shell’s management responded with cost cuts and a reduction in capital investment, and last week’s third-quarter results showed how the benefits had started to come through. Profits jumped sharply and free cash flow exceeded the quarterly dividend for the fifth quarter in a row.
As a bonus the price of oil is now back above $60 a barrel. The higher the oil price goes the safer the 5.8pc yield will look, and the higher the stock could go if confidence gathers that the payment is sustainable – relying on cuts in investment, disposals and debt for too long would work in the short term but hit Shell’s long-term prospects to the probable detriment of the dividend anyway.
This is not to say there is room for complacency as free cash flow cover for the dividend is still thinner than ideal and no one can forecast where the oil price is going. This column won’t try to do so, but Shell has proved that it can make good money and generate cash at $50 a barrel, which looks a good start to convincing the sceptics about 2016’s purchase of BG and the safety of that plump yield. The shares remain a good long-term portfolio holding.
Questor says: hold
Ticker: RDSB
Share price at close: £24.90
Update: Carillion
The disposal of a large part of its healthcare business to Serco, the sale of stakes in two property developers and the agreement of new debt facilities should buy stricken support services firm Carillion some valuable breathing space, while the appointment of a new chief executive also offers some welcome stability.
As a result, the group may be through the worst and having avoided it like the plague from well above 200p we can now see a case for it as a hold for anyone still involved.
However, the stock remains highly speculative, given its complex structure, skinny operating margins, large debt pile and substantial pension deficit, so there is no urgent need to start buying a fresh stake, at least until there is further clarity on any fundraising and debt reduction plans.
The company has a long way to go before it convinces that it is a worthy long-term investment and no more than a watching brief is required pending news on its finances.
Questor says: existing investors hold, otherwise avoid
Ticker: CLLN
Share price at close: 46p
Update: Watkin Jones
Shares in Watkin Jones, the student accommodation specialist, have risen by almost 90pc since we tipped them in January and now feels like a good time to bank a profit.
This is not to say anything is going wrong – far from it. Last week’s year-end trading update read very well. Results for the year just ended are due to meet expectations, all 10 developments scheduled for delivery in the new financial year have been forward sold and five more have already been forward sold for 2019.
But this good visibility means positive surprises are unlikely, at least in the near term, and the stock’s stunning run means it is no longer as cheap as it was. A forward price to earnings ratio of nearly 16 for fiscal 2018 represents a big premium to the mainstream builders, while the shares yield less, at 3pc, than building peers and the index.
This is a well-run company that is doing everything right but banking a substantial profit seems like a prudent plan given the valuation.
Questor says: take profits
Ticker: WJG
Share price at close: 249p
Russ Mould is investment director at AJ Bell, the stockbroker