BP plc’s progress is impressive but is Royal Dutch Shell plc the better buy?

Royal Dutch Shell Plc (LON: RDSB) could be a better investment than BP plc (LON:BP).

| 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.

Until 2010, BP (LSE: BP) was one of the FTSE 100’s most reliable dividend-paying stocks. The oil giant was also a favourite of hedge funds, pension funds, and income trusts thanks to its slow and steady nature as well as the company’s desire to achieve the best returns for investors. 

Then in 2010, tragedy struck. The Gulf of Mexico disaster forced BP to slash its dividend payout, sell off billions of dollars in assets and spend billions on lawsuits as well as compensation claims.

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!

Although it has since reached an agreement with US authorities over the total amount of compensation to be paid, BP is still paying for the Gulf of Mexico disaster and will be for many years to come. And aside from the obvious value of compensation that BP has paid out to victims of the oil spill, the disaster has also cost BP and shareholders an unquantifiable amount of long-term value. 

Loss of value 

As part of its drive to free up as much cash as possible following the disaster, BP sold off its world leading solar energy business and put its wind farm business (one of the largest in the US) up for sale as well. 

This withdrawal from renewables has hurt BP’s long-term prospects. Moreover, every $1 returned to victims of the Gulf of Mexico disaster is one dollar less BP has to invest in its business. BP is set to pay a record of $54.6bn in claims connected with the catastrophe. Over time, this loss of investment could cost the company hundreds of billions of dollars due to the effects of compounding.

Reinvesting for growth 

On the other hand, BP’s larger UK peer Shell (LSE: RDSB) has been able to reinvest almost all of its earnings over the past 10 years, which is great news for the company’s long-term investment prospects.

Indeed, even after acquiring BG Group in February, Shell’s capital spending is the highest among its rivals, exceeding that of US rival ExxonMobil and putting the company in a prime position to benefit if the price of oil returns to historic levels. 

At the same time, the group is committed to reducing its debt after buying BG and management is looking to reduce its gearing from around 25% back to a mid-teens level. 

Asset sales will be the main lever Shell is going to pull to reduce debt and this should high-grade the company’s portfolio as Shell looks to sell off non-core, low return assets to boost its cash pile. Once again, when the price of oil returns to more sustainable levels, this high grading will ensure that Shell’s profits recover faster.

The bottom line

So overall, if you’re looking for both price and income then Shell could be a better pick than BP. Shell’s shares currently support a dividend yield of 7.5% while BP’s shares yield a slightly more attractive 7.7%.

More on Investing Articles

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 undervalued passive income stocks I’d buy today with £1,000

Falling stock prices are pushing up dividend yields. As a result, our author is looking for undervalued passive income stocks…

Read more »

Close-up of British bank notes
Investing Articles

2 cheap dividend shares I’d buy in a heartbeat

Our writer picks a pair of FTSE 100 dividend shares he would consider for his portfolio, that he thinks look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With £500, I’d use the Warren Buffett method to find cheap shares

The legendary investor Warren Buffett has become a billionaire by following some key investment principles. Our writer explains why he…

Read more »

Man in a clothing store in a medical mask because of a coronovirus.
Investing Articles

Down 81%, are boohoo shares set for an explosive comeback?

boohoo shares have been falling rapidly. But could interest from a billion-dollar hedge fund cause a turnaround in 2022?

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

The Tullow Oil (TLW) share price jumps after losses! Is now the time to buy?

The Tullow Oil (TLW) share price ticked upwards on Thursday morning after falling nearly 30% over the last month. So,…

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

Is the Lloyds share price about to dip below 40p?

The Lloyds share price has been trading below 50p for the better part of the year. But could the stock…

Read more »

Cheerful young businesspeople with laptop working in office
Investing Articles

2 beaten-down FTSE 250 shares I’m buying and holding for the long term

Andrew Woods explains why he's adding two FTSE 250 shares to his portfolio in the middle of a market sell-off.

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

The Legal & General (LGEN) share price jumps 3%! Am I too late to buy?

The Legal & General (LGEN) share price soared in early trading on Thursday as the company registered a good start…

Read more »