The Royal Dutch Shell (LSE: RDSB) share price has plunged in value over the past 12 months. Including dividends to investors, the stock has declined 21% over the past year. That suggests it’s underperformed the FTSE 100 by 20% over this time frame.
The sell-off has only accelerated in recent weeks. Over the past month, shares in the oil major have declined by nearly 11%, underperforming the UK’s leading blue-chip index by 4%.
Investor concerns
There are a handful of reasons why this dividend champion has lagged the market recently. First off, falling oil prices have weighed on Shell’s earnings. According to recent trading updates from the company, profits dropped by more than 50% in the fourth quarter of 2019. This decline forced management to slow the pace of the group’s share buyback policy and put further cash returns at risk.
Unfortunately, it doesn’t look as if the business is going to get any relief at any time soon. Oil prices have continued to trend downwards since the beginning of 2020.
What’s more, the coronavirus has sent shockwaves around the global economy. As yet, it’s not clear what impact this will have on global oil demand. But initial indications suggest demand has slumped, and that’s terrible news for hydrocarbon produces.
Green energy
As well as falling oil prices and demand disruption, Shell is also under pressure from investors to increase its green energy spending. The company says it’s devoting around 10% of its annual capital spending budget to green projects. However, some analysts have speculated this might not be enough.
As well as this outlay, Shell is continuing to spend tens of billions of dollars every year on new hydrocarbon projects. There are growing fears the group could be throwing this money away as the world moves away from fossil fuels.
These worries are weighing on the stock price. Pressure from activists to get investment managers to divest fossil fuel holdings could also be having an impact.
All of the above have contributed to Shell’s recent share price decline. However, this could be an excellent opportunity for long-term income investors to buy a share of this global energy champion.
Long-term potential
While demand concerns are worrying, they’re likely to be temporary. When the global economy roars back to life, oil demand and the oil price should rise. On top of this, while there’s a genuine risk that Shell could end up owning billions of dollars of stranded assets, management seems to be taking action to minimise the risk of losses for investors.
Therefore, from a long-term perspective, Shell’s outlook doesn’t look as dismal as it does today. On top of this, right now you can snap up shares in the oil giant for just 9.2 times earnings. That suggests the stock offers a margin of safety at current levels.
The shares also offer a dividend yield of 8.5%, nearly double the FTSE 100’s, suggesting investors will be paid to wait for the stock to recover. Therefore, now could be a great time to take advantage of the market’s short-term outlook and buy Shell.
