Why I’d ditch IQE plc for Royal Dutch Shell plc

There’s a speculative aspect to both IQE plc (LSE: IQE) and oil behemoth Royal Dutch Shell plc (LON: RDSB), but the latter seems the safer of the two.

| 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.

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.

Compound wafer manufacturer IQE (LSE: IQE) has been on my radar for some time. I’m attracted by its patent-protected knowledge and its strong competitive positioning in the microchip world. 

Unlike a lot of smaller companies, it is also soundly profitable and racked up an 11% operating margin in the first half of this year. The company trades on a PE of 43 however, leaving little room for error. 

I had previously been excited by the firm’s licensing model – which was similar to ARM Holding’s approach – because it allows it to generate additional revenue without requiring the heavy investments associated with manufacturing. 

However, profit from this capital-light avenue has been sporadic. Last year IQE earned £6.7m in licensing fees, short of the £8m recorded the year before. I had hoped that licensing could become a larger part of the business because it could boost both margins and cash flows. 

That’s not been the case and the continued reduction in licensing earnings in the first half of this year took the shine off of the 17% increase in the Wafer segment. The company also doubled capital investment to £15m in the half, exceeding the £9.2m cash generated by operations. Growth is not exactly coming cheap. 

That’s not to say this bout of investment won’t bear fruit. The Internet of Things could massively increase demand for IQE’s products, so investing ahead of the curve to ensure services remain top-notch could be a great long-term approach. Some have speculated that IQE could be a major supplier for the new iPhone, which might explain this increase in spend, yet I believe the shares have been pumped up by this presumption and could suffer if it turns out to be hot air. 

I still like it as a business, but I won’t make an investment based on that rumour. I’d struggle to make a purchase until the shares are trading at a significant discount to today’s price. 

Shell’s safer

Despite the ever-present speculative nature of an investment in any oil major – due to the oil price issue – I believe an investment in Royal Dutch Shell (LSE: RDSB) is likely to be a safer than one in IQE. The company’s integration of BG Group has gone off without a hitch and its programme to dispose of non-core assets is having the desired effect.

Q2 cash flow from operations was up 604% in the first half of this year. This is perhaps the most important figure when considering the safety of the dividend. This increased cash flow covered the $3 cash dividend payment and helped reduce gearing to a manageable 25.3%.  

In my opinion, Shell looks like it’s in a good place to keep the oil and dividends flowing. The shares have already recovered significantly since the depths of the oil price crash and I’m not expecting a re-rating in share price anytime soon, but I feel the 6% yield on offer today could represent a solid defensive return in a market that is looking fully valued.

I’d certainly take shares in Shell over IQE today.

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.

Zach Coffell owns Royal Dutch Shell B shares. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

Investing £3.33 into an ISA every day from 22 could result in a £60,000 passive income

Millions of Britons use the Stocks and Shares ISA as a way to build wealth and generate an income. However,…

Read more »

Investing Articles

2 resurgent cheap shares that could skyrocket in 2025

Cheap shares can take our portfolios to the next level. Here, Dr James Fox highlights two stocks that appear to…

Read more »

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »