Bombed out oil companies Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) have been under pressure for some time now. The oil price decline has caused profits to fall and made operating conditions increasingly tough for all companies in the sector.
As larger companies, both Shell and BP have the financial firepower to take advantage of a weaker market, just like Shell has already done with BG Group (LON:BG). I believe both warrant a small holding, due to the long term price support, dividends and scope for growth.
Decade Lows
BP and Shell shares are both at prices not seen since 2008/09, when the oil price last plunged. This is encouraging for investors, and Shell in particular bounced off a long term trend line a few weeks ago. This would indicate that both stocks are nearing lows and that any shares picked up now have great potential for capital growth. Even if the oil price remains below $40 for this year both companies should pay out dividends that can provide income for you or a chance to re-invest and accumulate more stock.
Juicy Dividends
These two companies are some of the biggest dividend payers in the country — one in ten pounds paid by FTSE companies is the Shell dividend. Currently BP is yielding 7.9% and Shell is paying 8.6% — seriously high yields for large blue-chip companies. There has been much speculation over dividend cuts and whether either company can afford to keep dividends so high. However, both companies have pledged to maintaining their dividend at all cost. This adds confidence to income seekers out there and if you re-invest your dividends and compound the growth over the long term then you could make a fantastic return.
Contrarian Buys
Buying into resource companies at the moment is certainly a contrarian call and most investors around the world are staying well clear. When the market isn’t looking is when you can find real value in stocks and this is happening in the oil and gas sector at the moment. The world is awash with oil and the oil price shows no sign of recovery so far, most analysts around the world are looking for the last quarter of 2016 for rebalancing to happen in the oil market.
I believe these two companies are worth accumulating at these levels and the downside is somewhat minimised by dividend support. Income-seeking institutions and retail investors are beginning to buy stock and thus supporting the share price due to the great dividend yields on offer.
Having the opportunity to buy large companies like BP and Shell at these prices shouldn’t be ignored. Both offer huge dividends as well as scope for serious capital growth over the next few years. All types of investors should be researching these companies with a view to a possible investment, as their shares could be the star performers of the next five years.
