Shares in Shell are dirt cheap! Here’s what I’d do now

After recent declines, shares in Royal Dutch Shell are dealing at one of their lowest levels since 2014, which could make them too cheap to pass up.

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.

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. 

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.

Rupert Hargreaves 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

Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil's increasingly seen as evil. But BP's a cash…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

This FTSE 100 Dividend Aristocrat is on sale now

Stephen Wright thinks Croda International’s impressive dividend record means it could be the best FTSE 100 stock to add to…

Read more »

Investing Articles

3 shares I’d buy for passive income if I was retiring early

Roland Head profiles three FTSE 350 dividend shares he’d like to buy for their passive income to support an early…

Read more »

Investing Articles

Here’s how many Aviva shares I’d need for £1,000 a year in passive income

Our writer has been buying shares of this FTSE 100 insurer, but how many would he need to aim for…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

1 incredible growth stock I can’t find on the FTSE 100

The FTSE 100 offers us a lot of interesting investment opportunities, but there's not much in the way of traditional…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BT share price in the next 3 years

With the BT share price down so low, the dividend looks very nice indeed. The company's debt is off-putting, though.…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

28% revenue growth per year and down over 20% in price! Should I invest in this niche FTSE 250 company?

Oliver says this FTSE 250 company has done an excellent job bringing auctioning into the modern world. Will he invest…

Read more »