Why this FTSE 250 dividend stock could rise faster than the Shell share price

The oil market recovery has left FTSE 100 giant Royal Dutch Shell (LSE: RDSB) trading close to record highs. Today I'm going to update my view on Shell and highlight a potential opportunity elsewhere in the offshore sector.

There's more to come

When oil prices crashed in 2014, big producers launched urgent cost-cutting drives. The results have been impressive. For example, Shell now expects to be able to generate free cash flow of $25bn-$35bn per year at an oil price of $60 per barrel.

With Brent Crude now trading at about $76 per barrel, profits are soaring. The Anglo-Dutch group's half-year adjusted earnings rose by 36% to $10.3bn this year.

Shell's share price has now doubled since the start of 2016. But rising profits mean that the stock still looks reasonably priced to me, on 12 times 2018 forecast earnings and with an expected yield of 5.6%.

Looking ahead, earnings per share are expected to rise by 14% in 2019, giving a forecast P/E of just 10.5.

My view is that we're still in the early stages of the next oil market upcycle. Even if oil prices weaken again, I see very little risk that Shell will need to cut its dividend. The firm held its payout unchanged through the recent oil price crash and is now operating with much lower costs.

I'd rate Shell stock as an income buy.

A growth opportunity

At some point, I suspect the 'g' word -- growth -- will start to appear in oil executives' forecasts. When this happens, rapid profit growth could be slowed by rising spending, as firms invest in the next generation of oil and gas fields.

This will be the opportunity that oil services companies are waiting for. Customers such as Shell put these firms under huge pressure to reduce their rates during the downturn. In most cases, profits have not yet recovered.

One example is marine services group James Fisher & Sons (LSE: FSJ). During the first half of 2014, revenue rose by 20% in Fisher's Offshore Oil division. Underlying operating profit climbed 32% to £11.9m.

According to figures published today, the same operations generated an underlying profit of just £1.2m during the first half of 2018. Revenue rose by just 1% during the period.

It's clear that this group hasn't yet seen much of a recovery in Offshore Oil. Fortunately this is only part of a much larger business, which includes shipping, offshore wind farm support and other specialist marine services.

An under-the-radar buy?

Today's half-year results showed that James Fisher & Sons' underlying operating profit rose by 18% to £24.5m during the six months to 30 June. Group revenue was 12% higher, at £260.5m.

When profits rise more quickly than revenue, we know that margins are improving. In this case, underlying operating margin rose from 8.9% to 9.4%. My calculations show that the group's return on capital employed, another measure of profitability, has risen from 11.5% to 12.2% over the last six months.

I'm encouraged by this progress and attracted to the group's broadening mix of customers.

Trading on a forecast price/earnings multiple of 20, the shares look fully priced at the moment. But in my view this could still be a good long-term dividend growth buy, with the aim of topping up on any market dips.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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