The Royal Dutch Shell (LSE: RDSB) share price really stands out as a blue-chip income stock.
The company has paid a dividend every year since the second world war and as a result, is considered to be one of the most trustworthy dividend stocks in the FTSE 100.
However, the group is currently experiencing a turbulent period. Volatile oil prices coupled with environmental concerns have weighed on the stock. The Shell share price currently trades on a forward price-to-earnings (P/E) ratio of just 11.3. This suggests that it offers a wide margin of safety at current levels.
Overcome challenges
Shell’s future depends on the company’s ability to be able to overcome the challenges facing the business.
Historically, the company has coped quite well with whatever the market has thrown at it. In 2014, when the price of oil collapsed, management acted without delay to slash costs and reposition the business for the new environment.
The firm has continued to follow this approach since, which has helped its bottom line immensely. While the company’s results fell year-on-year for the three months to September, it still beat expectations.
The group reported earnings of $4.8bn on a current cost of supply basis — the measure tracked most closely by analysts — whereas analysts were calling for income of $3.9bn. Better energy trading results helped Shell smash expectations.
Management has said that the company requires oil prices to be above $66 a barrel in 2020 to meet its debt reduction targets and maintain its share repurchase activity. So far, the oil price has not reached this level, but rising geopolitical tensions could see it return to $66 soon.
Actions by the world’s largest oil producers to try to reduce production to force prices higher have also had an impact on prices over the past few weeks. This suggests producers will be proactive in keeping prices up throughout the rest of 2020.
Renewable energy
Shell is also making progress in its transition towards renewable energy. The firm has invested billions of dollars over the past 24 months, and management has earmarked billions more for the next few years. These actions imply that Shell isn’t going to stand still as the world changes.
As such, it could be a good time for long-term investors to take advantage of the current value on offer with the Shell share price. Not only does the stock’s valuation offer a wide margin of safety, but the share price also supports a market-leading dividend yield of 6.2%, which is covered 1.2 times by earnings per share.
Rising oil prices in 2020 could help turbocharge the company’s performance and put its debt reduction plans back on track. Therefore, now could be the right time to buy a slice of the business for the long run and pick up that 6.2% dividend yield while you wait.
