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Questor analyses the investment prospects of Royal Dutch Shell, the oil company…

Daily Telegraph

 Garry White

1 of 2 Companies

Royal Dutch Shell B

Royal Dutch Shell
£17.16 
+10p
Questor says HOLD

Shell’s fourth-quarter results announcement was a mixed bag.

Earnings momentum has disappeared because of the falling oil price – but this is hardly surprising. Profits will only start growing again when the global economy starts to recover, which is unlikely to happen until 2010.

This means that the risk to consensus earnings figures will continue throughout 2009.

However, there was good news on the dividend – and this should prove supportive to the share price. In fact, if you already own the shares, this is main reason that you should not sell.

The company hiked its fourth-quarter dividend by 11pc in dollar terms to 40 cents a share. However, the hike in sterling terms is greater because of weakness in the pound over the last year.

Perhaps the best dividend news related to 2009. The first-quarter pay-out will be upped by 5pc to 42 cents. This implies a dividend yield for 2009 of a very chunky 6.5pc. It also look rock solid.

Shell’s earnings are produced on a current cost of supplies (CCS) basis, which accounts for changes in the value of oil inventories currently held by the company.

Full-year CCS earnings hit a record of $34.1bn, boosted by the high oil price in the first half of the year, roughly in line with analysts’ expectations once negative currency movements are stripped out.

The oil price hit $147 a barrel in July and is unlikely that the price of crude will get anywhere near that level in 2009, so earnings are set to fall this year.

Production in 2008 fell 2pc year-on-year due to problems in Nigeria with the militant Movement for the Emancipation of the Niger Delta (MEND), asset disposals and a lower production sharing volumes.

It is likely that production will also be flat in 2009, but the group is targeting growth of 2pc-3pc each year from 2010 as it has a number of major projects coming on stream.

It is worth noting the difference between the ‘A’ and ‘B’ shares of the company – especially since the shares are currently a dividend play.

Dividends paid on class ‘A’ shares have a Dutch source for tax purposes, which means they are subject to Dutch withholding tax. Dividends paid on class ‘B’ shares have a UK source and are therefore not liable to Dutch taxation laws. UK investors wishing to make a purchase should therefore buy the ‘B’ shares to avoid any issues with tax.

The shares have performed well recently, rising 36pc from their November low. However, uncertainty about the oil price is likely to limit any capital gains for now. The company’s balance sheet is one of the strongest in its sector, with a gearing ratio of around 7pc.

Income seekers may like to consider a purchase to lock in the impressive yield but, on balance, Questor says hold.

SOURCE ARTICLE

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