Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is one of the longest-serving shares in my ISA portfolio. Over the last five years, it’s boasted an average dividend yield of 5.2%, and although annual dividend growth has only averaged 3.6%, it has been a good source of income.
Despite this, I’m starting to tire of Shell’s underperforming ways, and am wondering whether the firm is an oversized dog that has had its day. Should I cut it loose, and find a smaller, more focused business to invest in?
Let’s take a look at the facts.
The FTSE rides ahead
Shell is the FTSE 100’s largest member, with a total market capitalisation of almost £260bn.
A change in Shell’s share price can move the whole index, but the oil giant has lagged the FTSE by 29% over the last five years — its stock has risen by just 46% during a period that has seen the FTSE 100 gain 75%.
Falling returns
One of the reasons for Shell’s persistently high yield is that its shares trade on a 2013 forecast P/E of just 9.5.
Although Shell has no problems delivering top-line growth — its revenues have risen at an average of 5.6% per year, from $355bn in 2007 to $467bn in 2012 — the firm’s growth rarely seems to result in increased returns.
This is illustrated by Shell’s fixed asset base, which was worth $160bn in 2008, and is currently worth $243bn. Over the same period, however, Shell’s return on assets has fallen from 9.5% to 5.9%. This means that the return on Shell’s assets has remained broadly flat, despite a 50% increase in its fixed-asset base.
I do understand that Shell’s multi-billion dollar investments have a very long time scale, but how much longer should I wait for some results?
Time for a breakup?
Shell’s cash flow from operating activities was $10.4bn during the third quarter of this year, but capital investment for the same period was $9.7bn. Once you add in a few overheads and tax payments, Shell is basically spending everything it earns.
Small, young growth companies can sometimes justify reinvesting all of their earnings, but mature giants like Shell need to generate cash. In my view, Shell’s incoming CEO, Ben van Beurden, needs to start forcing the firm’s business units to focus on profit, not growth, even if that means their activities are scaled back slightly.