The Rising Influence of Rising Affluence

[DewDiligence]

Putnam fund manager likes Shell:

http://online.barrons.com/article/SB50001424053111904246304579304593265330788.html

What is compelling about Royal Dutch Shell is that its capital expenditures are peaking, and that the capital spending that they've been performing should generate expanded operating cash flow. So the confluence of those two events—capex peaking and then shrinking, along with operating cash flow growing—should allow for free cash flow to grow at a very compelling rate.

And they've got high-quality assets with very low decline rates—rates below the industry average. They've got a big presence in the Canadian oil sands, and they've got a big presence in liquefied-natural-gas areas that don't decline very fast over time. So they've got stable production and stable production growth, combined with free cash flow that should start to rise at a compelling rate and benefit their shareholders. And the stock has a 5% dividend yield.

… It is trading at the very low end of its peer universe. We look at these companies on a debt-adjusted forward cash-flow basis, and it is trading at around 4.2 times. Most of the industry is trading around 5.5 times or even a little higher. That doesn't sound like a big difference, but you could see a 25% valuation adjustment. That's setting aside the fact that the cash flow is about to improve.