Here’s why I’m still buying Royal Dutch Shell plc

Royal Dutch Shell (LSE: RDSB) is one of the companies in the FTSE 100 that investors love to hate. It’s also one of the companies income investors love and depend on to provide them with a steady stream of dividends. Indeed, Shell has been paying out higher dividends to investors since the end of the Second World War. It appears that management and shareholders alike expect this to continue.

This is just one of the reasons I like Shell. The company has a reputation for stability and predictability to uphold, and it would appear that management is well aware of this. Still, there’s no shortage of reasons why investors dislike the company today. Profits are falling and the company took on an enormous amount of debt earlier this year to acquire peer BG Group, which many analysts and investors believe the company overpaid for. The group’s debt-to-equity ratio has more than doubled in the past year to 28.1%, just under management’s limit of 30%.

To pay down some of the debt from the acquisition, Shell is planning to sell off $30bn of assets. The very fact that management has an upper debt limit and is prepared to sell off non-core assets to maintain it says a lot about its desire to keep the company’s reputation. 

Shell is targeting $8bn assets sales this year, but management has stated that the corporation is not going to give away assets at any price, offsetting fears that Shell may be forced to dump assets at fire sale prices if buyers fail to come forward, which is likely in the current environment. The company’s moderate gearing target of 30% means it has this flexibility to achieve the best result for shareholders.

A wide moat 

Another reason I like Shell is the company’s position in the oil world. Warren Buffett often talks about a company’s business “moat”. Shell’s moat is wide and deep. After acquiring BG, the enlarged group has become the largest LNG trader in the world, making it a critical part of the world’s energy infrastructure. Moreover, Shell and it’s European peer Total, are responsible for supplying most of Europe’s energy needs via their trading networks on a daily basis and this kind of integration would be impossible for a new market entrant to replicate.  

All of these traits lead me to believe that Shell will be around for a long time to come. The company’s dominance of certain energy markets, along with management’s steady hand on the tiller will keep the group moving along no matter what the economic environment or oil price.

That said, Shell won’t be able to return to its full glory unless the price of oil recovers to 2014 levels. In the near term this is unlikely, but over the next five or 10 years, the oil price may push steadily higher as a lack of investment curbs supply while demand continues to rise. I believe Shell could be the best company to play this trend. 

The company’s shares currently trade at a forward P/E of 27.5 and support a dividend yield of 7.2%.

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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.