This Is Why I May Sell Royal Dutch Shell Plc Today

Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is one of the longest-serving shares in my ISA portfolio. Over the last five years, it’s boasted an average dividend yield of 5.2%, and although annual dividend growth has only averaged 3.6%, it has been a good source of income.

Despite this, I’m starting to tire of Shell’s underperforming ways, and am wondering whether the firm is an oversized dog that has had its day. Should I cut it loose, and find a smaller, more focused business to invest in?

Let’s take a look at the facts.

The FTSE rides ahead

Shell is the FTSE 100’s largest member, with a total market capitalisation of almost £260bn.

A change in Shell’s share price can move the whole index, but the oil giant has lagged the FTSE by 29% over the last five years — its stock has risen by just 46% during a period that has seen the FTSE 100 gain 75%.

Falling returns

One of the reasons for Shell’s persistently high yield is that its shares trade on a 2013 forecast P/E of just 9.5.

Although Shell has no problems delivering top-line growth — its revenues have risen at an average of 5.6% per year, from $355bn in 2007 to $467bn in 2012 — the firm’s growth rarely seems to result in increased returns.

This is illustrated by Shell’s fixed asset base, which was worth $160bn in 2008, and is currently worth $243bn. Over the same period, however, Shell’s return on assets has fallen from 9.5% to 5.9%. This means that the return on Shell’s assets has remained broadly flat, despite a 50% increase in its fixed-asset base.

I do understand that Shell’s multi-billion dollar investments have a very long time scale, but how much longer should I wait for some results?

Time for a breakup?

Shell’s cash flow from operating activities was $10.4bn during the third quarter of this year, but capital investment for the same period was $9.7bn. Once you add in a few overheads and tax payments, Shell is basically spending everything it earns.

Small, young growth companies can sometimes justify reinvesting all of their earnings, but mature giants like Shell need to generate cash. In my view, Shell’s incoming CEO, Ben van Beurden, needs to start forcing the firm’s business units to focus on profit, not growth, even if that means their activities are scaled back slightly. 

An alternative to Shell

I'm not convinced that Shell's new CEO will be willing to swallow the bitter pill of downsizing, so I've been investigating alternative high-yield stocks that might deliver stronger future returns.

One share I've focused on is featured in the Motley Fool's latest special free report, "Today's Top Income Stock". This company currently offers a dividend yield of 5.5%, and the Fool's analysts believe it may currently be undervalued by almost 10%.

For full details of this highly-rated income stock, click here to download your free copy of this report immediately, as availability is strictly limited.

> Roland owns shares in Royal Dutch Shell.