Why You Should Let Royal Dutch Shell plc Look After Your Money

Does size matter? Royal Dutch Shell plc (LON:RDSB) thinks it does. Find out why…

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shell

Does size matter?

Of course it does, and Royal Dutch Shell (LSE: RDSB) knows all too well why that is the case.

Royal Dutch Shell’s (Shell) size is undisputed. Created by the merger of Royal Dutch Petroleum and UK-based Shell Transport & Trading, it is the second largest company in the world in terms of revenue. Shell also topped the 2013 Fortune Global 500 list of the world’s largest companies. A quick search online shows it has operations in over 90 countries, and has 44,000 service stations worldwide. It’s enormous.

So is it actually too big? CEO Ben van Beurden says it is.

You see, this is where being able to think outside of the box, as a CEO, is crucial. The easy, or at least the most straightforward, option for a CEO is to simply ‘grow’ the business. That means expanding, which involves: more capital expenditure; more plant and equipment; more oil; more products; more staff; etc. Where does that ultimately lead to? In Shell’s case, it’s led to growing pains. One growing pain is a dividend that’s been harder and harder to squeeze out (current yield under 5 per cent).

Profit

As always, the leader of a firm should be focused on one ultimate goal: profit. Spending that profit is a secondary, but important, concern. For Mr van Beurden, it means cutting back on scale and size in order to make the business more effective and efficient.

According to the Wall Street Journal, Shell’s chief says he wants to sell around $15 billion worth of assets by the end of 2015. He also plans to cut investment spending to around $37 billion this year (down from $46 billion).

Regeneration

However, it’s not just about slashing and burning. You also need to re-generate. In terms of the oil and gas giant’s fundamentals, the CEO has his sights firmly set on free cash flow. A glance at the quick ratio (0.87) and you can see that Shell could be spending more time generating cash, rather than trying to take over the world.

Show me the money

As an investor, this fork in the road for Shell is crucially important — it also goes to the heart of what it is that makes a stock a worthwhile investment. Clearly, size and scale are important for stability and dividend security. But what happens when this goes too far? This example shows that cash is still king. It’s so important for a business to be able to generate free cash flow; both for growth in dividends, but also to be able to sit back and determine how to best run the business. Getting bigger and producing more won’t necessarily guarantee more profits. Rewarding investors and improving margins, however, will most certainly produce profits.

Importantly Mr van Beurden has also mentioned Shell was eyeing investment opportunities in deep-water oil exploration and production, and in integrated gas projects. It looks like Shell could be changing it spots ever so slightly so it evolves at just the right pace to ensure long-term survival as an oil and gas mega-player. It’s a stock well worth your attention.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »