Bluechip names Royal Dutch Shell Plc (LSE:RDSA) and HSBC Holdings Plc (LSE:HSBA) have each suffered a torrid 2015 with share prices down 30% and 11%, respectively. The core business areas for both companies aren’t forecast to rebound for quite some time, but is now a long-term investor’s opportunity to buy a winner at bargain basement prices?
Downward spiral
Shells’ share prices initially withstood the bottoming-out of oil prices quite well due to a healthy balance sheet and downstream assets bringing in significant cash from refining options. The April announcement of the company’s $55bn planned takeover of BG Group Plc is what broke resistance and sent the share prices spiralling down to where they are today.
Analysts view the takeover with significant scepticism as the possibility of years of oil prices in the doldrums will weigh heavily on the combined companies’ ability to grow profits. While the takeover may well be overpriced, with a barrel of Brent crude costing nearly half of what it did when the deal was negotiated, it shows Shell is thinking long term. It clearly views the acquisition of BG’s significantly-easier-to-develop oil fields and LNG operations as key factors in future growth.
Additionally, the acquisition of BG group will help in the short term as its cash flow will allow the combined Shell/BG to sustain dividend payments through 2016. Although the company posted a staggering $6.1bn loss in the third quarter, much of this was due to writing down assets that hadn’t panned-out and free cash flow was dinged only slightly.
With Shell’s dividend currently sitting at a 7.5% yield covered by next year’s earnings even without BG Group, I believe investors with a long time frame would be well served by giving Shell a closer look. But a dividend cut is not off the cards completely, especially if many analysts get their way and convince Shell shareholders to call off the BG Group purchase.
Long-term pick
HSBC’s woes come down to a slowdown in emerging markets and the familiar theme of the failure of the once-lauded universal banking model. CEO Stuart Gulliver has responded by selling off its Brazilian operations for $5.2bn, lining up buyers for its Turkish arm and promising $5bn in cuts by 2017, largely through axeing some 50,000 jobs.
Alongside these moves away from low-margin areas, HSBC has recommitted itself to its traditional breadbasket, the Asia Pacific region and China in particular. While recent news out of China has been all doom and gloom, investors should take the long view and recognise the growth possibilities for HSBC’s wealth management and retail operations. In a Chinese consumer-driven economy with a wealthier middle class seeking bank accounts, credit cards and the like, the prospects for HSBC are positive.
It’s my view that these sensible moves, plus solid growth prospects in core areas, a P/E ratio hovering around 11 and a 6% yield mean that HSBC is an appealing share to own for long-term investors. That’s as long as management continues to aggressively cut costs and move assets to higher profit areas of the business.