Why I think this jewel in Royal Dutch Shell’s crown makes it a buy today

Following Royal Dutch Shell plc’s (LON:RDSB) acquisition of First Utility, the firm looked set to reap dividends for UK shareholders. Does this still stand?

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.

In addition to packing hefty dividends for shareholders, stocks in the utilities sector have traditionally been reliable, yielding slow but steady growth over the longer term on investment.

In Q2 of this year, the FTSE 100 was boosted by the strength of the shares in utilities, where market uncertainties left many other sectors falling in value.

However, Royal Dutch Shell’s (LSE: RDSB) acquisition of First Utility in December last year was met with enthusiasm by investors seeking to purchase utilities shares without relying on the major six market players in the UK to enter the sector.

Initially, Shell’s acquisition promised enhanced profits and a greater market share nationally, building on the 825,000 homes served by First Utility at the time for their gas, electricity and broadband provision.

Big promises

Following the acquisition, First Utility’s directorate were immensely positive about their future market capture, making claims that the organisation was now in prime position to begin capturing a corner of the market.

However, enthusiasm was dampened as we saw the collapse of regional supplier Future Energy at the beginning of 2018, prompting strong debate as to the profitability of the UK’s household energy market.

Wholesale prices spiked, and gas & electricity provider Brighter World Energy soon followed Future Energy and folded. For a while, it seemed that even backing by a powerhouse such as Shell couldn’t provide First Utility with the resources required to compete with the big players such as npower and E.ON.

Market fluctuation in energy prices went on to see First Utility register a FY16 pre-tax loss of £12.7m, leaving many investors doubting whether the firm could regroup and return to profitability; however, in FY17 First Direct recorded a pre-tax profit of £29m.

An uncertain start stabilises

Against the odds, Shell’s acquisition has seen First Utility begin to make a profit once more, despite the ongoing market uncertainty and fierce competition from bigger players.

Brexit uncertainty and slowed economic growth could enhance dividend yields, despite First Utility failing to deliver on anticipated market share to compete with the big six power firms. This is why I feel confident that Shell’s acquisition could still be a savvy step for the firm.

Minor setbacks have still shaken the stability of the firm, with recent criticism from Ofgem relating to the organisation’s poor complaints management, further undermining investor confidence.

However, I suspect Royal Dutch Shell is still a positive prospect for long-term investment, as First Utility benefits from Shell’s acquisition and expertise. This could be a sensible investment, as Shell seeks to capitalise on the positive reception for industry contenders capable of challenging the ‘big six’ utilities market leaders.

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.

Jen Syrkiewicz has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

Down 85%, but I’m backing this FTSE 250 stock to fly like the Rolls-Royce share price

The Rolls-Royce share price has flown to the stars and Harvey Jones thinks it's too late to buy. So he's…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Is now the right time for me to buy revived FTSE national institution Marks and Spencer?

Marks and Spencer was once a revered FTSE 100 firm, but poor decisions led to its demotion in 2019. Now…

Read more »

Market Movers

Up 11% today, can this FTSE 250 stock finally get motoring?

Jon Smith explains why the Aston Martin share price has jumped this morning, but urges caution after he picks apart…

Read more »

Investing Articles

With £456m of net cash, FTSE 100 stock easyJet’s ready for take-off

Our writer's been positive on this FTSE 100 for some time, but these Q3 results and its growing cash pile…

Read more »

A senior woman sits up on the exam table at a doctors appointment. She is dressed casually in a blue sweater and has a smile on her face as she glances at the doctor. Her female doctor is wearing a white lab coat and seated in front of her as she takes notes on a tablet.
Investing Articles

Primary Health Properties: a FTSE 250 REIT with a 6% yield, a growing dividend, and a positive outlook

After its latest results show rental income growth, Stephen Wright's looking to buy a FTSE 250 REIT set to benefit…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

How much passive income could I make for every £1,000 invested in Aviva shares?

Even a relatively small investment in Aviva shares could generate much greater passive income, particularly if the dividends are reinvested…

Read more »

Close-up of British bank notes
Investing Articles

I’m considering 100 shares in this FTSE 250 gem to aim for £300 a month in dividends

Mark Hartley outlines why a lesser-known banking stock from the FTSE 250's worth considering for an income portfolio in 2024.

Read more »

Investing Articles

History suggests these UK shares might soar if interest rates are cut in August

Some UK shares could rocket if interest rates fall from its 5.25% high next month. And there's one our writer…

Read more »