Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today, I’m looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS.B.US).
What is the sustainable competitive advantage?
Being the world’s second largest oil company, Shell has a strong competitive advantage over its peers. That said, the company is having to tackle increasing competition within the oil industry as global reserves dwindle and the black gold becomes increasingly hard to find.
However, Shell is well placed to stay ahead of its peers thanks to the company’s 100+ years of experience, huge global presence and debt free balance sheet.
Still, despite its size, Shell’s profitability lags that of its closet London listed peer, BP, as around 25% of Shell’s income comes from the process of refining, a process that has a much lower profit margin than the rest of the company’s operations. Indeed,Shell’s gross profit margin stands at 23%, while BP’s stands at 27%.
Nonetheless, although the process of refining has a relatively small profit margin, these operations do provide a stable and predictable income for Shell, which gives the company a competitive edge that not many of its London listed oil peers can boast.
Company’s long-term outlook?
Long-term investments are only successful if customers keep coming back to the company year after year and, as a major player in the oil industry, Shell is not likely to see a fall in the demand for its products any time soon.
However, Shell’s future is somewhat limited by the amount of oil the world. In particular, Shell’s own oil reserves, which totalled 32.5 billion barrels of oil at the end of 2012.
That said, this reserve enough for 26 years of production at current rates.
Furthermore, Shell currently has 30 exploration projects under construction, which management believes will unlock an additional seven billion barrels of oil. Management is also targeting a 21% rise in production by 2018, from 3.4 million barrels per day to four million.
In addition, Shell is already using its size, financial firepower and key position in the industry to produce new renewable energy technologies, reducing its dependence on oil.
Shell has been around in its current form since 1907 and the company is well placed to last another 100 years. The company’s size and market leading position mean that there are very few threats to Shell’s market dominance and demand for the company’s hydrocarbon products is unlikely to slow anytime soon.
Furthermore, Shell has one of the best dividend histories in the FTSE 100, consistently paying and raising its dividend every year since 1945.
So overall, I rate Royal Dutch Shell as a very good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.