The Beginners’ Portfolio: What If We’d Bought Royal Dutch Shell Plc Instead Of BP Plc?

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I’m currently looking back over my past decisions, which is what we all should do at intervals in order to learn from our successes and mistakes, and as part of that I recently took a look at GlaxoSmithKline and wondered whether I should have gone for AstraZeneca instead.

Battle of the oilies

royal dutch shellThere are other obvious comparisons in the portfolio, and today I’m turning my attention to BP (LSE: BP) (NYSE: BP.US) and considering whether we’d be better off in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).

Since I chose BP on 2 August 2012 at a buy price of 434.5p, the shares have risen to 443p for a gain of only 2%. But Shell has actually fallen, from 2,276p on the day to 2,122p, for a drop of 6.7%. If we’d put a £500 slice of our money into Shell instead of BP, here’s how much we’d have paid in total and how much the stake would be worth today:

Company Cost Today Change Dividends Total %
BP £499.01 £480.34 -£12.74 £31.72 £18.98 3.8%
Shell £477.96 £435.62 -£54.53 £29.48 -£25.05 -5.2%

(As of 14 October 2013)

I was surprised by that outcome, as I’d been thinking of the two as pretty much neck and neck. And though it’s nice to see BP ahead and it might support my opinion a year or so ago that it was relatively undervalued, it doesn’t tell us anything yet about whether I made the best long-term choice.

Today’s valuation

Now that the prices have moved, what’s the valuation like?

BP EPS % P/E Dividend Yield Cover
2013 49p +33% 8.9 23p 5.2% 2.1x
2014 57p +16% 7.7 25p 5.7% 2.3x
Shell EPS % P/E Dividend Yield Cover
2013 230p -12% 9.2 115p 5.5% 2.1x
2014 255p +11% 8.3 119p 5.6% 2.2x

(Source: Morningstar)

We can see BP’s earnings set to recover as as expected, but other than that there’s no real difference in the market’s valuation of the two companies.

Back in 2012 I rather glibly glossed over any further costs from the Gulf of Mexico disaster. But that was clearly premature, as we’ve seen a lot more claims than expected at the time. And though BP’s recent court victory was welcome, there will still be the risk of more surprises until the last penny of compensation is paid.

Which is best?

If we were buying today, which would I go for? I recently had a look at Shell as an investment candidate for novices and, largely leaving out valuation, I preferred it to BP — Shell has less upstream risk exposure, has greater turnover and lower debt, and is better diversified geographically.

Overall, with share valuations looking pretty similar, I’m now leaning towards Shell as the better candidate for a multi-decade investment — I don’t think last year’s undervaluation was deep enough to cover the added risk with BP. In reality, I still think the long-term differences in returns will be minimal, but I think Shell’s lower risk could be key. Time will tell whether I got it wrong.

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> Alan does not own any shares mentioned in this article.