The Motley Fool

Is Royal Dutch Shell Plc Dead Money?

There’s nothing worse than analysts labelling a company ‘dead money’, the slang term given to an investment that’s unlikely to produce a positive return for the foreseeable future.

If the investment truly is dead money, the likelihood of a turnaround is low and investors should consider selling the shares before incurring additional losses.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Unfortunately, the market seems to think that Royal Dutch Shell (LSE: RDSB) is dead money. But is this really the case? 

Dead or alive? 

There are two main reasons why the market believes that Shell is dead money. Firstly, the price of oil is trading at its lowest level in 12 years and secondly, it’s widely believed that Shell is paying a premium price to acquire its smaller peer BG Group

Shell’s £40bn tie-up with BG is one of the largest deals the oil sector has ever seen, but it has also become one of the most criticised. The consensus among City analysts is that Shell is overpaying, although Shell’s management remains adamant that the merger will make sense if oil returns to $60/bbl. 

Nevertheless, it looks as if the merger is going to take place. But Shell’s existing shareholders face significant dilution if the company’s plan to sell assets and buy back shares issued as part of the deal doesn’t work out. With oil prices where they are today, it’s a buyer’s market for oil assets, which increases the risk that Shell might not be able to meet its asset disposal target.

Moreover, if Shell can’t raise all the cash it needs from asset sales, then the company’s dividend might be at risk. Shell hasn’t cut its payout since the end of the Second World War, so any payout cut would be a significant event for the company. 

It comes down to oil 

It all comes down to the price of oil. If you believe the price is set to recover, then Shell could be a great investment at current levels. The company’s 9.7% dividend yield is 2.3 times more than the FTSE 100’s average yield of 4.2%, and reinvesting these dividends will turbo-charge your investment returns when Shell’s shares recover. 

On the other hand, if you believe that the price of oil will remain below $60/bbl for the foreseeable future, then Shell might not be for you. If the price of oil continues to languish below $60/bbl then Shell’s merger with BG could make the company’s shares dead money. Without a recovery in oil prices Shell will end up overpaying for BG, the company won’t be able to raise enough cash through asset sales to reduce debt and Shell’s dividend payout could be at risk. 

That being said, it should be noted that the nine members of Shell’s senior management team together have more than 100 years of oil industry experience, so it’s highly likely that they know how to manage a market downturn like the one that’s taking place today.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.