I have long been a fan of Royal Dutch Shell (LSE: RDSB) as an investment, given its consistent and strong dividend combined with a decent business model and strong outlook. It suits both my growth and income criteria.
A weakening share price recently has done nothing to change my opinion, and in fact I think it may offer interested investors an opportunity.
Shareholder returns
Shell has always been a consistently good dividend payer, and as such is a prime candidate for anyone interested in an income-focused portfolio. Its current yield of 6.5% is one of the best on the FTSE 100, and, having seen consistent dividend growth of 5.1% over the past five years, I am confident that these levels will continue.
Unfortunately Shell did warn in October that its previous promise of share buybacks might be impeded by global economic weakness and low energy prices. I certainly don’t take this caution lightly; however, Shell has managed to pay investors decent returns through the lean times before. I have no doubt this warning is just a way of managing expectations.
The 15% drop in earnings that sparked the announcement and, perhaps even more importantly, the potential slowing in its debt reduction, are of greater concern. However, they nothing I consider worrying about too much just yet. The price of oil and gas, however, is something we do have to consider when looking at Shell as an investment.
No tax please
Making headlines for Shell recently was news that it paid no UK corporate income tax in 2018, despite earning pre-tax profits of £731m. This news may be controversial, but the company used a perfectly legitimate mechanism of receiving government rebates and reliefs as it decommissions some of its oil and gas assets in the North Sea.
What I find more interesting is that the assets being decommissioned are those of the Brent oilfield – which underpin the crude benchmark of the same name.
By the laws of supply and demand, less production of Brent crude should eventually filter through (all other things being equal) to a higher oil price. This will, of course, be to Shell’s benefit, though its loss of production in this field will need to be made up elsewhere.
Clean energy
Increased environmental concerns and moves towards renewables are likely to be a headwind for Shell in the long term. However, despite very public noises, the world has not yet really shown the kind of appetite for clean energy that will hurt the oil industry. Nevertheless, Shell is setting itself up to be a competitor in clean energy in the future.
The company has been developing its own renewable energy research, as well as showing a nice appetite for diversification that makes me think it could be a strong investment for many years to come.
Oil prices fluctuate, and I think investors in Shell should be expecting to hold on for a few years rather than making a quick buck. Having said that, I think Royal Dutch Shell shares are still well worth adding to almost any portfolio.