Why Neil Woodford Is Avoiding Royal Dutch Shell Plc and BP plc

Royal Dutch Shell Plc (LON:RDSB) and BP plc (LON:BP) are staples for many equity income fund managers; but not Neil Woodford.

| More on:

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.

royal dutch shellCity star Neil Woodford ditched ‘big oil’ from his hugely successful Invesco Perpetual Income and High Income funds over four years ago.

Woodford, of course, had no foreknowledge of the BP (LSE: BP) (NYSE: BP.US) oil spill in the Gulf of Mexico in April 2010. Rather, he was concerned about the sustainability of BP’s dividend, and that of rival Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).

Having left Invesco, Woodford has been on a two-week roadshow ahead of the launch of his new CF Woodford Equity Income Fund on 2 June. The master investor has been discussing everything from the global macro-picture to individual stocks. And he’s still not keen on BP and Shell.

Big call on big oil

BP’s dividend has been growing strongly since an enforced cut as a result of the Gulf of Mexico oil spill. The board hiked last year’s dividend by 8.8%, and increased this year’s first-quarter payout by 8.3%.

Shell has resumed decent dividend growth after a lacklustre few years following the financial crisis. Last year’s rise was 4.7%, and the board has upped this year’s first-quarter payout by 4.4%.

Many equity income fund managers were impressed with the first-quarter results, and the shares of BP and Shell have recently made 52-week highs of 507p and 2,592p, respectively. Woodford is maintaining his contrarian position that both dividends are at risk.

His main concern is that BP and Shell are funding dividends from asset disposals — “selling the family silver”, as he puts it — and not earnings growth. He’s also sceptical about the companies’ promises to cut capital expenditure; and, if they do, the impact on production growth and, ultimately, the dividend. He describes BP and Shell as “two very stressed organisations”.

Woodford’s position is very simple: when companies are funding their dividends by disposals, he expects a significantly higher yield as compensation. He says: “I don’t own BP or Shell, and I won’t own them until they are much better value than they are now”.

Current valuations

BP is trading at 507p at the time of writing: 10.5 times forecast 2014 earnings, with a prospective yield of 4.6%.

Shell, whose shares trade at 2,444p, is rated at 11.2 times forecast earnings, with the same 4.6% prospective income.

On the face of it, those valuations look good against the wider market. However, it seems it would take a single-digit earnings multiple and a dividend yield north of 5%, before Woodford would even consider adding BP or Shell to his new fund.

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.

G A Chester does not own any shares mentioned in this article.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »