Suppose you faced the challenge of selecting one FTSE stock right now, to buy and hold for 10 years, with nothing else. What would you choose?
It’s risky, so I’d focus on long-term safety, looking for a number of key characteristics. My pick would be Royal Dutch Shell (LSE: RDSB), and I’ll tell you why.
Firstly, I’d want a top-drawer blue-chip stock, so I’d restrict myself to the best of the FTSE 100. Not newcomers, but ones that have been on London’s top index for years. And they literally don’t come any bigger than Shell, whose £190bn market cap makes it by far the biggest of them all — it’s about the size of HSBC Holdings and Barclays put together.
Next, it would have to be a long-term progressive dividend payer, offering above average yields. I’m not worried about short-term shocks, though Shell did keep its dividend going throughout the oil price slump. Over the long term, Shell has been paying dividends that have soundly beaten the FTSE 100’s average (which stands at around 3.1% to 3.4% depending on who you ask.) Forecast yields for Shell stand at 6%.
I’d also want a stock whose total returns have consistently beaten its index. And Shell has done that too. Over the past five years, the oil crisis had led to a share price underperformance compared to the FTSE 100. But since the turn of the century, Shell shares have gained around 20% compared to the Footsie’s 13%. And when you add those far superior dividends, Shell is way ahead in the total returns stakes.
Cash is key
To support its progressive dividends, I’d also look for strong cash generation. Now this has been a weakness over the past few years, but that’s against the long-term trend. Forecasts suggest the 2019 dividend should be covered almost 1.4 times by earnings, but what about the cash itself? In February’s full-year results, Shell reported a 73% rise in operational cash flow to $35,650m with free cash flow of $27,621m (from an outflow of $10,348m a year previously.) Looks like its getting back to ‘business as usual’ to me.
There would also need to be a solid long-term demand for the company’s goods or services. And come on, it’s oil and gas, without which the world simply cannot function. I know there’s a growing trend towards renewable energy supplies, and that’s a very good thing. But I really don’t see the demand for fossil fuels falling off significantly in my lifetime.
Can’t be beaten?
I’d also want a company that is defensive, and which has a strong moat around its business so that new upstarts are not going to take its livelihood. The world’s big oil companies, with their massive capital investment, easily pass that one. And unlike pure upstream producers, a company like Shell operates at every upstream and downstream stage, from exploratory drilling all the way to filling your car.
As we’re really in a global economy, I’d want serious worldwide diversification. And well, what do I need to say about Shell on that score? Around 35% of its turnover comes from Europe, 20% from the USA, and a rising chunk is down to the growing economies of the East, led by China.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.