Investment Column: Shell's dividend hike oils the wheels for income seekers

Derwent London; BATM

Alistair Dawber
Wednesday 18 March 2009 01:00

Our view: Buy

Share price: 1579p (+1p)

The fact that Royal Dutch Shell is increasing its dividend is news in itself. At a time when companies ranging from some of the biggest on the FTSE 100 to the smallest Aim-listed groups are cutting back to preserve cash, a hike in returns for investors will be wholly welcomed.

The Anglo-Dutch exploration, production and refinery group said yesterday as part of its 2009 strategy update that it would pay out $10bn this year, a 5 per cent increase on the amount paid out to investors last year.

The strategy report is the company's attempt to update the market on operational matters, and with the price of oil in particular being so volatile in the last year, investors should note that Shell says it is loath to change its longer term investment policy.

It will spend an extra $31bn to $32bn on investments this year, to maintain what it says is a market leading portfolio. That marks a change from the last two years when the company has launched fewer new projects to counter the effects of what watchers at Killik Capital argue was "the peak of the cost cycle".

The strategy report had little impact on the shares yesterday, but existing investors will be quietly pleased. Last week, rival BP said that it too would be paying a dividend, but would not be drawn on how much.

True, while Shell's investors should be concerned about what the chief executive, Jeroen van der Veer, calls "testing times in the oil and gas industry", they should note that despite the price of oil falling by about $100 a barrel in the last eight months or so, Shell's shares have outperformed the rest of the FTSE 100.

Those at Killik argue that the shares are a buy. "The main reason for holding the shares is the yield," they say. "We'd remind investors that the group declares its dividend in dollars, so a 5 per cent increase in the dollar payout in 2009 would equate to a 26 per cent increase in sterling terms at current exchange rates. With the shares trading on a prospective yield of 7.7 per cent, we remain buyers." We would argue that investors heed the advice. Buy.

Derwent London

Our view: Cautious hold

Share price: 610p (+18p)

There was a small rise in the share price of Derwent London yesterday, and most of the analysts were upbeat, after the property company, which lets middle-tier West End commercial locations, declared that it was pleased with its annual numbers.

There was a time, up to a couple of years ago, when investors could rely on property groups showing huge annual net asset value (NAV) growth, and it comes to something when the market is encouraged when a group like Derwent says that it is pleased with a NAV fall of 32 per cent in 2008. Vacancy rates were up for the year, while the dividend was also up, by 8.9 per cent to 24.5p.

The chief executive, John Burns, says that the group is resilient and that being in London's middle market, the Derwent is a good property punt.

Most of the analysts agree, and stress that on a relative valuation basis – compared to other property stocks – Derwent looks like a decent pick. Experts at Arbuthnot say: "The shares are trading at a discount of 25 per cent to our 2009 asset value [estimates] and we consider them to be good value." They also rightly point out that the yield of 7.1 per cent is attractive.

There are other reasons why investors might find themselves impressed: the shares have lost about 18 per cent of their value since the start of 2009, which is at least 20 per cent better than an average of the rest of the property sector.

The question for investors, however, is whether they need to hold property stocks at all. Parts of the industry are suffering and that will affect others, like Derwent, that are outperforming. The company's shares are down nearly 60 per cent in the last year, not because there is anything wrong with the group, but because of the market's inherent lack of confidence in the sector as a whole.

Mr Burns says that 2009 will be a year of the company keeping its head down and getting on with the job. That is no doubt a good strategy, and one that will suit investors, but we would be cautious about the whole sector for a while. Cautious hold.


Our view: Buy

Share price: 26.75p (-2p)

Most chief executives would claim that a 20 per cent hike in full-year pre-tax profits and a jump of 39 per cent in revenues was an indication that their company was doing a super job, despite the recession.

For Zvi Marom, the boss of BATM, however, the full-year numbers are bittersweet. "We could have grown by 60 per cent or 70 per cent had it not been for the recession," he says, arguing that investors should set little store by quarterly, half-yearly or even annual results.

Regardless of Mr Marom's aversion to short-term indicators, investors will be encouraged that the stock is up 15 per cent in the last month, largely in anticipation of yesterday's numbers from the group, a technology company that provides broadband and telecoms systems and services.

Mr Marom says that he is cautiously optimistic about 2009, but that the economic strife will hit his business and everyone else's too, and that investors are far better buying into a stock for the longer term. A company, like his, that is naturally cautious and sticks to its strategy through good times and bad, is the best bet, he claims.

The stock is not expensive, say watchers, despite the impressive growth in the last month, and BATM's numbers prove that it is coping well. While it is unlikely to generate huge excitement, investors need stocks that have plenty of the long term "steady-as-she-goes" characteristics. Buy.

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