Is Royal Dutch Shell plc The Best Buy In The FTSE 100?

Does the likely BG deal and other factors make Royal Dutch Shell plc (LON:RDSB) the best buy In The FTSE 100?

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.

The last few weeks in the Oil & Gas sector has been eventful. OPEC chose not to cut its output rates and then the oil price fell off a cliff. Currently WTI sits just above $36 and Brent’s not much better at around $38. This has sent Royal Dutch Shell (LSE: RDSB) down to levels not seen since 2009. The share price is currently below 1,500p. 

For me this represents a huge buying opportunity that shouldn’t be missed. Shell has a whopping dividend yield of over 8% and a PE ratio of 7.7. The market believes that a dividend cut is inevitable but I’m not so sure. The dividend record of Shell is impeccable and this isn’t the first oil price decline the company has been through. The dividend cover is solid due to the flying profits of the downstream division. This is because integrated oil companies have huge downstream divisions that offset losses from the upstream division when the oil price falls. 

Cost controls

In response to the decline in the oil price Shell has reduced costs and capital investments to make the company “more focused and competitive”. And there have been divestments across the globe to make Shell a more streamlined company before the BG deal. 

Many believe that the BG Group (LSE: BG) will push the company forward and ensure its future. It has now passed regulatory approval in Europe, Brazil, Australia, the US, and as of yesterday in China. This merger will ensure the dividend for years to come due to BG’s ultra low cost developments in Brazil and Australia. I also believe that Shell will do anything to ensure the deal goes through. CEO Ben Van Burden has said that he will do everything he can to ensure the takeover goes smoothly and there have also been staff cuts in the thousands to get the company ready for the deal. Only yesterday the company announced it was cutting around 3% (2,800) of the enlarged workforce. It has also said there will be over $3bn worth of cost synergies after the deal and this should aid Shell’s bottom line hugely. 

BG share opportunity

RBC said yesterday that the preferred play here is to buy BG shares as a way to get Shell shares at a discount. Even though the deal has now passed all regulatory approvals there is still merger arbitrage to be played. Currently the offer premium stands at around 13%, this means that the BG share price is trading around 13% lower than the offer is worth in terms of the cash and Shell shares that will be received. For anyone looking to increase a holding or open a position in Shell, it’s a very attractive opportunity and one that deserves to be looked at in detail. 

Obviously there can be no assurances that the deal goes through. However, the rhetoric from Shell indicates it will happen at all costs. I believe that the enlarged group will be a fantastic investment in years to come in terms of capital growth and income. 

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.

Jack Dingwall has shares in Royal Dutch Shell. 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

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 »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »