If you’re new to investing and have a small sum to invest, I think one of the first companies you should buy for your equity portfolio is Royal Dutch Shell (LSE: RDSB).
In fact, I believe the Shell share price was one of the first companies I bought for my portfolio when I first started investing. It remains a key holding of mine today.
Safety in size
What first attracted me to this company is its size and reputation. Shell might not be a household name, but it’s one of the oil world’s largest businesses. It doesn’t produce as much oil as the sector’s biggest player, ExxonMobil, but it has an extensive oil trading and downstream (refining and marketing) division.
This part of the business is so large it supplies around half of Europe’s daily energy needs — that’s no mean feat however you look at it.
Built for the long term
Shell has been around in one form or another for more than 100 years and, considering its size and importance to the global energy markets today, I think it’s highly likely that the company will still be around 100 years from now. Something would have to go seriously wrong for the enterprise to lose its dominant position in the oil and gas market during the next few decades.
Even the relentless rise of renewable energy doesn’t look as if it will disrupt Shell. The company has devoted a portion of its capital budget (just under 10%) for investment in renewables and related businesses, which isn’t much, but it’s a start. I would rather see the group build its position in the low carbon economy slowly without making mistakes rather than charging in and then having to take substantial write-downs if the strategy doesn’t yield the desired results.
The most recent renewable energy investment is a stake in Alphabet’s (Google’s parent company) Makani Power, which is developing electricity-generating kites.
As well as investing for the future, Shell is also committed to keeping costs as low as possible for its existing operations, maximising cash flow to keep its balance sheet clean and reward investors. For example, in 2018, even though oil prices weren’t particularly high (averaging $70-$75 per barrel), the company still managed to throw off enough cash to fund a $2.5bn buyback and reduce net debt by $14.5bn to $51.4bn, representing a gearing ratio of 20.3%.
Paying investors
Shell has paid a dividend to investors since the Second World War and, considering all of the above, I don’t think the company’s dividend record will be disrupted anytime soon. With this being the case, the Shell share price’s dividend yield of 5.8%, which is around 1% above the FTSE 100 average, looks extremely attractive, and a P/E ratio of just 11.7 isn’t too dear.
So, that’s why I think the Shell share price should be one of the first companies you buy for your equity portfolio. It’s a world-leading business generating handfuls of cash and has a dividend record that’s unlikely to be disrupted anytime soon.
