6 Reasons Why You Should Consider Royal Dutch Shell With A 5.5% Yield

| About: Royal Dutch (RDS.A)

Royal Dutch Shell PLC (NYSE:RDS.A) is an integrated energy company with both upstream and downstream operations. It produces the equivalent of 3 million of barrels of oil per day which makes it one of the top producers.

RDS made huge investments to exploit natural gas, which is its specialty, and that backfired in a pretty big way, which is a drag on the company's ROIC. However, I believe it is for that reason, this solid company with a market cap of 215 billion, can be acquired at an attractive price.

1. RDS Attractive Dividend Yield

At its current price RDS yields about 5.5% annually, paid out in a quarterly dividend. In addition, over the last year and this year, the company was engaged in buybacks. Returning capital to shareholders is high on the list of priorities of management and apparently they agree the stock is undervalued.

2. RDS is in great financial shape

The company is in good financial shape. Debt/Equity is about 0.15 and Royal Dutch has a strong cashflow and more projects coming online. EBIT to interest expenses stands at 34.

3. RDS projects

Shell has a well diversified portfolio of projects. Both upstream and downstream projects as well as projects in stable markets and politically more fragile markets.

4. Proven Reserves

Shell has 12 years of proven reserves left. Their reserves are equal to the equivalent of 14250 million boe. This is a substantial amount and although one of the great challenges of oil majors is to keep their reserves adequate, Shell managed to do this effectively over the last few years.

5. Terrible Margins

Because RDS made a big bet on natural gas exploitation in North America and prices are lower than expected, this is a significant drag on its margins. If we compare RDS to competitors, like Exxon Mobile Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), this becomes clear. Although there is definitely some pain here, it appears likely the company will be successful in tightening up this underperformance. The CEO hints in the Q1 2013 call that they are catching up and there might be more to come. Possibly that will drive earnings in the right direction.

RDS.B Gross Profit Margin TTM Chart

RDS.B Gross Profit Margin TTM data by YCharts

6. Attractive Valuation

In my opinion the company is attractively valued with price/tangible book value of 1.2 and a P/E ratio slightly below competitors Exxon and Chevron at 8.5. When we look at Enterprise Value/Free cash flow, Royal Dutch is slightly more expensive than Exxon, but way ahead of Chevron. I don't think RDS is undervalued by a huge amount but do think this is an attractive price if you are looking for a strong company with a good payout ratio in your portfolio.


If an oil major is something you are looking for to add to your portfolio, it might pay to consider this foreign company. It pays out an attractive dividend yield and currently has adequate reserves and little debt.

If you are interested in RDS.A you might be interested in this recently published article comparing oil majors by fellow SA contributor Timing Best Buy, who performed a few interesting analyses on oil majors.

There are different versions of the stock available, for most investors it's wise to buy the British version of the stock (the B series) and not buy the Dutch series (NYSE:A) of the stock. The dividend is taxed and although this can be recouped, it's easier to buy the B series of shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.