Royal Dutch Shell (LSE: RDSB) did something this year that many investors had considered unthinkable. In the wake of the Covid-19 pandemic, the oil giant slashed its dividend. That’s been the story of dividend stocks across the FTSE 100 this year. But Shell is different. Shell had never cut its dividend since the Second World War. The Shell share price plummeted, and sat on a 60% loss less than a month ago.
Since a recent low on 28 October, Shell has rebounded with a 45% jump. Why the sudden change in fortunes? Well, it’s mostly down to the general market upturn as a result of Covid-19 vaccine developments. We now have three vaccines that have yielded very positive results in trials. The FTSE 100 has itself gained 15% since these results started coming in.
Shell share price bouncing back
But why has the Shell share price rebounded so much more strongly than the index? Essentially, it looks like a result of the size of the fall in the first place. By mid-March, when Shell shares had crashed 60%, the Footsie was down only around 30%.
I really was surprised by the extent of the market’s hostile reaction to Shell’s dividend cut, and I think the sell-off was seriously overdone. After all, Shell, and other big oil companies like BP, are surely among the most long-term of long-term investments? And they’d surely suffer less than those with much shorter-term risks?
But the dividend cut really does seem to have shocked the investment world, as the huge Shell share price crash shows. If any stock was thought of as a reliable long-term investment, surely it was Shell. After all, Shell weathered the 1970s oil crisis, and the more recent oil price slump, without a dividend cut. So why should the pandemic necessitate one?
It’ll never be the same again
It looks like there are two key reasons why the Shell share price is under sustained pressure now. Firstly, while we’re all captivated by the coronavirus threat, it’s easy to miss the fact that we’re in another oil price slump. When the last one eased, production levels still remained high, and the glut continued to hold prices back.
And with the sudden fall in demand in 2020, the price of a barrel crashed below $20 in May. It has recovered to around $45 as I write, but still below the $75 or so levels that I look for to support long-term oil stock investment.
On top of that, there’s the increasing pressure to wean ourselves away from fossil fuels. That’s nothing new, and it’s been on the back burner for years. But it has assumed a keener focus in 2020. And it’s already led to drastic new plans from BP, for example.
No more oil?
BP’s strategy includes a tenfold increase in low-carbon investment by 2030, rising to eightfold by 2025. And hydrocarbon production down 40% by 2030, emissions from operations down 30%–35%, upstream emissions down 35%–40%… the list goes on. Pressure on the sector to move in the same direction seems unavoidable, and I can see Shell share price weakness for quite some time to come.
But even with the rebased dividend, analysts still put future yields at around 4.5%. I think 2020 could still prove to be a good time to buy Shell.
