If I had to choose just one stock to buy today and hold for 10 years, my choice would be easy. There are plenty I like the look of — still can’t see Lloyds Banking Group as anything but undervalued, I reckon AstraZeneca could well be on the cusp of a new growth phase, and forecast dividends of more than 5.5% from National Grid look very tempting.
There are more too, but for me by far the tastiest on the market right now is Royal Dutch Shell.
I don’t yet own any Shell shares, and you’d be quite right to ask me why I haven’t put my money where my mouth is. But the key word is “yet” and I will be buying some as soon as I complete the tortuous process of getting some pension funds transferred.
Why Shell?
My colleague Roland Head summed it up nicely by saying “the shares trade on a modest 12 times forecast earnings with a dividend yield of 5.9%. In my view, this is one of the safest dividends you’ll find.” Let’s dig a bit deeper.
The shares are currently priced at 12 times forecast earnings for 2019, and that would drop to only a little over 10 if the earnings growth predicted for 2020 proves accurate. The long-term FTSE 100 average stands at around 14, so on its own that’s a positive indication. But not enough to swing it.
Cash
Next up is the key attraction for me, the dividend. Currently forecast at 5.9% based on today’s share price, that’s a cracking annual return. It beats the pants off a Cash ISA where you’d be lucky to get 1.5%. And it’s significantly higher than even the record FTSE 100 average of 4.9% predicted for 2019.
A 5.9% yield would double the value of an investment made today in approximately 12 years. That’s from dividends alone, and any share price growth would be a bonus. Is the dividend as safe as Roland thinks? It’s something I repeat often, but it’s a stunning fact… Shell has not cut its dividend even once since the end of World War II, and that includes the 70s oil crisis and the recent oil price slump. I can’t see safer than that.
Oil price
You might think that Shell’s future is going to depend a lot on the price of oil, but I see that as really only a short-term concern. The dip to $30 per barrel in 2016 was unsustainable, as whole countries would have gone bust in the long run at that price. Shell is profitable at around $50 and, at current prices, is throwing off masses of cash.
Hurdles?
What else might hurt Shell? Some folk foresee the end of our dependence on oil. That’s a genuine concern, but surely only a very long-term one. We’ll see more carbon-efficient ways of using oil, for sure, and growth in electric-powered transport will shift to centralised combustion with the potential to be far cleaner and more efficient.
But there just isn’t a source with sufficient energy density to replace oil any time soon (other than nuclear power, which is pretty much off the table). And which companies have the expertise and the cash to develop alternative ways of generating energy (including from oil itself)? I’d say the likes of Shell.