What Could Go Badly Wrong With Royal Dutch Shell Plc & Rio Tinto plc At These Prices?

Royal Dutch Shell Plc (LON:RDSB) and Rio Tinto plc (LON:RIO) are not similarly appealing, argues this Fool.

| More on:

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.

“I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.” — Benjamin Franklin. 

If estimates from analysts are correct, there’s a great chance you could record pre-tax returns of about 100% or more by investing in Shell (LSE: RDSB) and Rio Tinto  (LSE: RIO).

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

I have very different views on Rio, but Shell is indeed tempting. 


The average price target from brokers is 42% higher than Shell’s current stock price of 1,600, according to consensus estimates from Thomson Reuters — and that implies a price target above 2,200p for most analysts.

If the most bullish brokers are right, however, upside could be as much as 170% from Shell’s current level. 

I don’t actually know if you’ll ever record a performance north of 100% investing in Shell in this environment, but I know that under a base-case scenario where oil prices rise between 20% and 30% from their current levels, and based on the possible liquidation value of its assets, its shares should be worth at least 2,000p — and that partly excludes some of the additional benefits that its tie-up with BG may bring.

If I am right, its forward yield will get closer to 6% from its current level of 7.7%. 

It’s virtually meaningless to pay attention either to its 52-week range of 1,502.5p–2,431.5p or to its trading multiples because the “New Shell” that will emerge from the combination with BG — and I am convinced the deal will go through — will be a very different beast. It is useful to consider, though, that key to value creation will be flawless execution from its management team, and this remains the biggest risk for shareholders. 

Management risk also plays a big part when it comes to deciding whether or not to invest in Rio.


Most analysts seem to agree that Rio is undervalued by about 30%, and those in the bull camp argue for capital gains in the region of 80% or more. Frankly, I am not convinced that Rio is an appealing equity investment, although the $606m sale of a 40% stake in the Bengalla coal mine in eastern Australia this week was a step in the right direction. 

Its stock should trade at a 20% to 30% discount to its current level based on the fair value of its assets, in my opinion, and such a view is also supported by uncertainty surrounding its payout ratio — a less generous dividend policy is not priced into its stock right now, in my view. I’d be more comfortable with a forward yield closer to 5%, which implies a dividend cut of 20% this year, assuming a constant stock price at 2,200p.

Finally, while I do not think that a rights issue is strictly necessary over the next six months, the debate remains open on whether Rio will be able to withstand the prolonged pressure stemming from a very unpleasant market environment for commodity prices. Its current valuation of 2,230 is only 6% above the low end of its 52-week range (2,090.5p-3,280p), and a technical analyst could argue about a support trendline around this level. 

More on Investing Articles

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

I wouldn’t buy Bitcoin today. FTSE value stocks look much better value to me

Now looks like a promising time to buy UK value stocks, while Bitcoin still looks far too risky for me.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price is below 85p. Here’s what I’m doing!

The Rolls-Royce share price has suffered this year. Trading for below 85p, this Fool decides whether this is an opportunity…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

4 dividend stocks to buy as inflation soars!

I'm hunting for the best dividend stock to invest in as global inflation soars. Here are several high-dividend-yield shares that…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

UK shares to buy now: 3 big fallers I’d snap up

Our writer thinks this trio of strong business performers could be attractive UK shares to buy now for his portfolio.

Read more »

Lady researching stocks
Investing Articles

Could a falling stock market help me get rich?

When the stock market falls, what does it mean for our writer's portfolio? Here's why it could be an opportunity.

Read more »

Hand holding pound notes
Investing Articles

Should I buy these two 12%-yielding dividend shares for my Stocks and Shares ISA?

Do these double-digit dividend yielders offer our author the right balance of risk and reward for his Stocks and Shares…

Read more »

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

3 reasons to buy Lloyds shares at 43p

Our writer outlines three factors that make him bullish on Lloyds shares, as well as one noteworthy risk facing the…

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

How I’m investing my money in this bear market

Bear markets can present amazing opportunities for long-term investors. But a cautious approach is sensible, says Edward Sheldon.

Read more »