Global

Comparing Royal Dutch Shell plc (RDS-A) and Aflac Incorporated (AFL)

Royal Dutch Shell plc (NYSE:RDS-A) shares are up more than 2.02% this year and recently decreased -0.16% or -$0.11 to settle at $68.06. Aflac Incorporated (NYSE:AFL), on the other hand, is up 2.01% year to date as of 04/16/2018. It currently trades at $44.77 and has returned 2.71% during the past week.

Royal Dutch Shell plc (NYSE:RDS-A) and Aflac Incorporated (NYSE:AFL) are the two most active stocks in the Major Integrated Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect RDS-A to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, AFL is expected to grow at a 10.75% annual rate. All else equal, AFL’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 24.88% for Aflac Incorporated (AFL). RDS-A’s ROI is 4.30% while AFL has a ROI of 10.50%. The interpretation is that AFL’s business generates a higher return on investment than RDS-A’s.

Liquidity and Financial Risk

RDS-A’s debt-to-equity ratio is 0.44 versus a D/E of 0.22 for AFL. RDS-A is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RDS-A trades at a forward P/E of 12.25, a P/B of 1.45, and a P/S of 0.93, compared to a forward P/E of 10.94, a P/B of 1.43, and a P/S of 1.61 for AFL. RDS-A is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. RDS-A is currently priced at a -12.34% to its one-year price target of 77.64. Comparatively, AFL is -3.24% relative to its price target of 46.27. This suggests that RDS-A is the better investment over the next year.

Risk and Volatility



Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. RDS-A has a beta of 1.09 and AFL’s beta is 0.94. AFL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. RDS-A has a short ratio of 1.28 compared to a short interest of 2.54 for AFL. This implies that the market is currently less bearish on the outlook for RDS-A.

Summary

Aflac Incorporated (NYSE:AFL) beats Royal Dutch Shell plc (NYSE:RDS-A) on a total of 8 of the 13 factors compared between the two stocks. AFL higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, AFL is the cheaper of the two stocks on an earnings and book value, Finally, SU has better sentiment signals based on short interest.

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