The resources sector offers upside potential in my view, which is why I’m focusing on the investment potential of Royal Dutch Shell Plc (LON:RDSB) (RDSB.L), Glencore PLC (LON:GLEN) (GLEN.L), BHP Billiton plc (LON:BLT) (BLT.L) and Anglo American plc (LON:AAL) (AAL.L). Could they improve my portfolio returns?
Glencore has made positive changes to its business model in recent years in my view. The company has been able to cut costs and reduce debt levels on its balance sheet. This has created a more sustainable business in my opinion that is better able to perform well in a variety of market conditions.
With Glencore’s PE being around 12, I feel that the business is undervalued and could deliver improving share price performance.
Shell is in the process of improving its financial outlook. It is expected to increase free cash flow over the next couple of years, and this may allow it to pay down debt in order to put itself in a stronger financial position.
With Shell also having the potential to pay a higher dividend over the next few years, it may become a more appealing income stock. Its 5.5% yield is already one of the highest in the FTSE 100, but could improve further.
BHP Billiton’s income appeal also remains high in my view. The company has a dividend yield which is currently above 4%, and it has the potential to move higher due to the prospect of firmer commodity prices.
Since BHP Billiton has a diverse business model, it may be able to better survive a downturn in the resources industry than many of its sector peers. Therefore, I feel it has an appealing risk to reward ratio.
Anglo American has made various changes to its business in recent years which have made it more efficient and streamlined. Asset disposals and a restructuring have enabled its EPS performance to improve, with dividends returning after a hiatus.
Although Anglo American still has further scope to improve its business model in my view, I feel that it has strong growth potential for the long term.