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A successful investor understands the importance of adding well-performing stocks in the portfolio at the right time. Notably, indicators of a stock’s bullish run include a rise in share price and strong fundamentals.
Royal Dutch Shell plc RDS.A is one such shining star in the Oil/Energy sector that has been on a healthy growth trajectory. The stock has had an impressive run on the bourse over a year and possesses a great potential to continue its momentum forward. Shell’s shares have returned 17.1% in a year, outperforming 7.4% gain of the industry it belongs to.
If you have not taken advantage of the share price appreciation yet, it’s time you add this Anglo-Dutch supermajor to your portfolio. Let’s delve deeper to check out why Shell is an attractive pick right now.
Stellar 2017 Results
Shell reported earnings of around $15.8 billion in 2017 — a whopping 119% surge compared with 2016. The European oil giant generated cash flow from operations of $35.6 billion, up 73% from $20.6 billion recorded in 2016. Moreover, Shell was comfortably able to cover its payouts with cash from operations — something investors really want right now.
Importantly, Shell tops the charts in generating organic cash flows. Notably in 2017, the company generated an impressive $27.6 billion in free cash flows, the most by any supermajor. Shell has also raised its guidance for free cash flow and now expects to generate $25-$30 billion by 2020. The company’s solid results underscore the fact that it has successfully adapted itself to thrive at $50-barrel crude.
Impressive Dividend and Buyback Programs
Hit by the oil slump, the company had resorted to scrip dividend program as a cost-containment effort. However, massive growth in income and cash flows, along with recovering energy landscape have encouraged the supermajor to abort its scrip dividend program and even resort to share buyback programs.
The company resumed cash dividends from the fourth quarter of 2017. It also plans to buy back shares of at least $25 billion by the end of 2020. With the buyback, Shell will be able to overcome the dilution problem under its scrip dividend plan.
Shell-BG Buyout Bolsters Outlook
Shell’s $50-billion BG Group acquisition from 2016 seems to be a game changer. The move has boosted its strong and diversified portfolio of global energy businesses that offer attractive long-term growth opportunities. The acquisition has not only led to various financial, commercial and cost synergies but also made Shell the largest liquefied natural gas producer in the world.
Divestment Spree Bodes Well
The company is concentrating on upgrading its portfolio and simplifying operational structure by vending the less profitable non-core assets. With already closing $23 billion worth sales, the company is on track to achieve its $30 billion divestment target by 2018. Further, it announced asset disposals worth $2 billion and additional $5-billion divestment deals in advanced talks over and above the $23 billion completed.
Reaffirming its priorities to slash costs and cut debt, Shell, which ended 2017 with a debt-to-capital ratio of 25.4%, now aims to reduce the leverage to 20% on the back of operational efficiency and divestment spree.
High Margin Projects Propel Output Growth
Shell is poised to generate robust production growth through the end of the decade, driven largely by its primary upstream growth engine. With its various major projects underway (including Gbaran-Ubie Phase 2 Gorgon LNG project, Prelude floating LNG facility among many others) and substantial presence in Brazil offshore development, their significant contribution to volume growth may well be expected.
Focus on Renewables: A Prudent Strategy
Adapting to the changing times, Shell is successfully reorienting and re-strategizing its business to de-carbonize the energy system, with gradual shift to alternative fuels in order to sustain its business models, if the demand for fossil fuels starts waning in the coming decades.
The company has been making investments in biofuels, wind/solar energy, carbon capture and storage (CCS) technologies among other such initiatives. In this regard, the company is also taking active interest in increasing investments in charging stations and electric vehicles, inking deals with IONITY, New Motion and First Utility.
Early this year, it also inked a deal to acquire stakes in Silicon Ranch Corporation, a leading solar energy company, leverage its position as one of the top three wholesale power sellers in the United States along with boosting its New Energies division.
In fact, Shell plans to double its investment to $2 billion a year in its New Energies division as it intends to sharpen its focus on cleaner and renewable energy sources. The company believes that pumping money into New Energies unit is likely to increase its customer base significantly and drive revenues.
Other oil majors like TOTAL S.A. TOT, Chevron Corp. CVX and ExxonMobil Corp. XOM have also started making efforts to make investments in alternative fuels.
Favorable Rank, VGM Score, Earnings Estimate Revisions
Shell carries a Zacks Rank #2 (Buy) with a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
It also displays an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering a positive average earnings surprise of 9.34%.
In the last 30 days, the Zacks Consensus Estimate for Shell’s 2018 earnings has witnessed upward revisions, showcasing analysts’ confidence in the company. The Zacks Consensus Estimate for 2018 is pegged at $4.93 per share compared with $4.86 per share projected 30 days ago.
Further, it has a long-term expected EPS growth rate of 8%.
Looking at these positives, we believe that Shell is an energy stock that deserves a place in investors’ portfolio.
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