Royal Dutch Shell shares are falling today. Here’s what I’d do next

Royal Dutch Shell shares are falling today and the company faces big challenges, but I still see it as a top FTSE 100 income stock.

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I’ve remained positive towards Royal Dutch Shell (LSE: RDSB) shares, despite the many challenges the company faces. My patience is being tested today, though, as full-year results show 2020 profits falling to a 20-year low.

The FTSE 100 oil giant’s share price is down around 3% after Q4 adjusted profits disappointed, with the figure of $393m a hefty 87% lower than a year ago. Low oil and liquified natural gas (LNG) prices played a part, and Shell also reported lower production volumes and refining margins. This was partly offset by lower operating expenses and higher chemicals margins.

Royal Dutch Shell shares have had a tough year, as pandemic lockdowns and travel bans destroyed oil demand. They trade 35% lower than 12 months ago. Worryingly, this is part of a longer downward trend. The stock trades 41% lower than a decade ago.

Fallen FTSE 100 income hero

At least long-term investors have banked plenty of dividends along the way, as Shell has been one of the best income stocks on the FTSE 100.

Famously, it hadn’t cut its dividend since the war, but Covid-19 ended that proud record last April. Management cut its dividend by two thirds to 16 cents a share, in a move chief executive Ben van Beurden called “monumental”. In October, he lifted the Q3 payout to 16.65 cents, which was less than monumental.

Management now predicts the dividend will climb to 17.35 cents in the first quarter of this year, so at least it is heading in the right direction. Shell now offers a forecast yield of 4%, which is modest by recent standards, but hopefully more secure, as it is covered twice by earnings. That’s something in this era of low interest rates. As we would expect, Royal Dutch Shell shares are cheaper than they were, trading at a forward valuation of 12.4 times earnings.

Van Beurden has embarked on a “complete overhaul” of the business, as it looks to shift away from fossil fuels. As with BP, the idea was that oil and gas revenues would power the clean energy transformation, but the pandemic has rattled that theory.

I’d still buy Royal Dutch Shell shares today

Today’s reports show Q4 production down 14%, due to OPEC cuts, lower demand and hurricanes in the Gulf of Mexico.

At least management has started whittling down its $75bn debt pile, paying off $4bn by cutting costs and preserving cash. Disposals totalling billions of dollars will help.

When considering Royal Dutch Shell shares, I have to remind myself this is not the company it was. The new Shell has yet to be born, and the process will be costly, risky and expensive. Smaller, fast-moving rivals may have an advantage.

The good news is that oil inventories are falling and crude is climbing towards $60. The company still generated $6.3bn of cash flow this quarter. Royal Dutch Shell shares are riskier than they were, but I’m betting they will climb higher as the recovery comes.

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.

Harvey Jones 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.

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