Shares in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) have had a good 12 months, gaining 8% compared to the 2% the FTSE 100 has managed, though over five years the outperformance has not been so strong — Shell kept track with the FTSE until early this year, since when it’s put on a spurt to reach 63% while the FTSE has only just broken 50%.
But even though things have been tough for the big oilies of late, with upstream exploration costs rising and consumer demand restrained, Shell surely has to be a great long-term buy, doesn’t it? Here are three reasons why I think so:
1. Fundamentals
Looking at any company regardless of the business it’s in, when I see higher-than-average dividend yields from shares on a lower-than-average P/E ratio I sit up and take notice.
Shell has been paying dividend yields in excess of 4% regularly, and that’s set to continue — forecasts indicate a 4.4% yield this year followed by 4.5% next, based on today’s 2,510p share price. The FTSE 100 offers an average of around 3%.
Forward P/E multiples stand at 11.5 and 11.2 for 2014 and 2015 respectively, and that’s significantly below the FTSE’s long-term valuation of 14.
2. Recession
The recession has hurt demand, for sure. Even supermarkets selling essentials like food have been hit. And with rising energy prices, belts have been tightened and fuel use has been minimized. And that’s all great for the save-the-planet thing.
But it has put pressure on share prices of companies supplying essentials, even the most defensive ones. Still, as our economies continue to recover, general consumer demand will rise, and that will require the consumption of more fuel. Defensive stocks that hold up during recessions can shine when the bad days are behind us.
3. Oil
Yep, it’s oil — one of the very few commodities the world just cannot do without. Think we’ll switch to a world of renewable energy sources any time soon? Don’t delude yourself.
The day will surely come, but it will be slow and gradual, largely because renewable sources just don’t have anything like the energy density of good old oil. I’m sure the end of oil dependency won’t happen in my lifetime, and I doubt even our grandchildren will see it.
A reliable strategy for building the backbone of a solid long-term portfolio is to buy shares in a few companies that provide our absolute essentials. And oil will surely be one of them for the foreseeable future.
