It is hard to imagine that a blue-chip company such as Royal Dutch Shell (RDS.A) could become significantly undervalued given all the money that chases the larger-cap stocks.
That is generally why I try and follow young companies that have yet to hit their strides. If I can learn about a young company before everyone else looks at it, I can move in opportunistically after good news arrives.
What attracted me to Royal Dutch Shell was its 7.2% dividend yield. A yield that high suggests that the market believes that a dividend cut is coming, but after I looked at the company presentation, I'm not sure that is true.
Going forward it appears that Shell is going to be able to generate more free cash flow at $60-a-barrel oil than it was in the years when oil cost $90 a barrel.
Take a look at the company projections in the slide below:
Image source: Shell corporate presentation
The increase that the company is projecting is not a minor amount. From $12 million in 2013 to 2015 Shell now thinks it can generate $20 million to $30 million of free cash flow from 2019 to 2021.
That doesn't just suggest that the current dividend is sustainable; it suggests that the dividend could eventually be increased.
Equally important to note is that this is what Shell thinks that it can do with oil at $60 per barrel. What is the company capable of if oil prices get back up to $70 per barrel and higher?