One of the biggest companies on the London stock market is Shell (LSE: SHEL). Its market capitalisation of £150bn is second only to AstraZeneca. As a blue-chip share, it is understandable that Shell pops up in many pension portfolios.
But does that mean it is right for me?
One foot in, one foot out
One risk I see for the company is its transition from fossil fuels to alternative energy sources. Like local rival BP, Shell has made a lot of noise about its ambitions in new energy areas. But I am concerned that in practice, moving away from fossil fuels may mean sacrificing profits.
I expect oil and gas to continue to be the key profit drivers for Shell. But compared to US rivals like ExxonMobil, Shell has been vocal about making fossil fuels a smaller part of its long-term product mix.
That could be good or bad for the Shell investment case. Shell cannot now be seen simply as a boring oil and gas company. It is actively developing more strings to its bow. If oil demand declines that could turn out to be a smart way of diversifying the company’s earnings. But personally I expect long-term demand for oil to stay high. I think by shifting some of its focus, Shell risks taking its eye off the ball in its core business. I think more focussed, nimbler renewable energy companies may be better placed to do well in that area than a legacy oil major.
No dividend is ever 100% safe
Some investors used to say, “never sell Shell”. After all, with the dividend having been kept at the same level or raised annually since the Second World War, many investors took the payment for granted.
It therefore came as a rude awakening in 2020, when Shell slashed its annual payout by 65%. Since then, it has been raising the dividend fairly fast. But it still stands only at around 53% of its pre-pandemic level.
The episode was a stark reminder that no company is ever a completely safe choice when it comes to dividends. Even if a firm has paid out consistently for generations, it can still dramatically cut or even cancel its dividend. In that sense, I do not see Shell as a particularly safe choice for my pension.
The dividend reduction made it easier for the company to cover it from earnings. Last year, for example, dividend coverage was 2.8 times. But a lower oil price could eat into earnings in future. Shell’s management has demonstrated that it does not regard the dividend as sacrosanct.
My move on Shell shares
The future for energy is uncertain and I have already learnt to my cost that Shell’s dividend history – like that of any company – is no guarantee of what will come next. I therefore see Shell as neither boring nor safe – and it is not a share I want to own in my pension portfolio.