Shares in oil giant Royal Dutch Shell (LSE: RDSB) – the largest listed company on the London Stock Exchange – lost almost 4% of their value in early trading today as the company reported on a fairly uninspiring fourth-quarter performance.
With the stock down roughly 25% in value since last summer, should Foolish investors run for the exits? I’m not so sure.
Before explaining why, let’s take a closer look at today’s announcement.
Tough times
Due partly to lower oil and gas prices, “net income attributable to shareholders on a current cost of supplies (CCS) basis” – the company’s jargon-tastic preferred measure of profit – fell 48% to $2.9bn compared to Q4 in 2018. For the full-year, the same measure fell 23% to $16.5bn. This was below what analysts were expecting, which goes some way to explaining today’s share price capitulation.
CEO Ben van Beurden tried his best to put a positive spin on things, stating that the company had delivered a “competitive cash flow performance in 2019 despite challenging macroeconomic conditions”.
He went on to say that the business was committed to completing its $25bn share buyback programme (roughly $15bn of shares have been purchased so far) but that the pace of this depends on how the global economy behaves and “further debt reduction”.
Personally, I like it when management are prudent. It’s when they promise the world I start to worry.
Stick or twist?
Shell’s share price is now down to levels not seen since 2017. That implies there’s value to be had.
But let’s not kid ourselves – no one buys Shell’s stock with the expectation of making a huge capital gain. The firm’s chief attraction has always been its ability to shower investors with dividends ($3.7bn was returned over the last quarter).
Assuming the situation does not change dramatically, Shell is currently forecast to pay a total of around 187 cents (144p) per share in 2020. Taking today’s share price wobble into account, that gives a stonking great yield of almost 7% – far higher than the vast majority of those companies that make up the market’s premier league.
Clearly, no company can offer absolute certainty when it comes to their payouts and Shell is no exception. Risks include global growth slowing by more than expected and/or trade tensions between the US and China resuming. Although too early to say, the coronavirus outbreak in China could also put further pressure on the oil price.
Another hurdle Shell faces is the need to adapt its business to reflect the growing demand for renewable energy, requiring increased investment (with implications for dividend growth).
Despite all this, the fact that the company has famously not cut its cash returns since the end of the Second World War should not be underestimated. I doubt anyone would want such an action on their CV, even during times of strife. As such, you can bet that the management will pull out all the stops to stay in investors’ good books. The fact that this year’s payout is likely to be covered 1.4 times by profits also provides some reassurance.
All told, I suspect Shell is worth sticking with for the income it offers but only as part of a diversified portfolio. And if tracking the fortunes of 20 or so shares sounds like hard work, there are far easier ways for investors to generate a second income stream.
