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Is Royal Dutch Shell plc a good ISA stock after the recent share price fall?

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Royal Dutch Shell (LSE: RDSB) shares have not escaped the recent FTSE 100 sell-off. After a strong finish to 2017 and a positive start to January in which Shell’s share price rallied from around 2,400p to a 52-week high of over 2,600p, the stock has since fallen back to the 2,260p level today. That share price represents a 13% decline from January’s high.

There’s no denying that Shell is a world-class company. The oil major has a total market capitalisation of almost £200bn and is the largest weighting in the FTSE 100 index. As a result, the stock is held by the majority of large mutual funds and pension funds. If you own Shell shares, you’re in good company.

But does Shell’s current share price offer value? Is the oil major a solid pick for an ISA at the moment? Let’s take a look at the investment thesis.

Valuation

With analysts expecting Shell to generate earnings per share of $2.35 for FY2018, the stock’s current forward-looking P/E is a reasonable 13.6. That’s bang in line with the average FTSE 100 P/E according to Stockopedia. It’s worth noting, however, that rival BP has a slightly more expensive valuation and currently trades on a forward-looking P/E ratio of 14.7. This suggests that Shell is the better value of the two stocks. Overall, I think Shell’s valuation is quite reasonable after the recent share price fall.

It’s worth pointing out that the oil price fell sharply during February’s sell-off, with Brent dropping from over $70/bbl to around $62/bbl. Oil has since recovered to $67/bbl, yet Shell’s share price remains depressed. This leads me to believe that it could potentially rebound higher when we get through this current period of high volatility.

Dividend

We can’t talk about Shell without mentioning the dividend, as the oil major offers one of the highest yields in the FTSE 100 at present. Last year, Shell paid its shareholders $1.88 per share in dividends. At the current share price and GBP/USD exchange rate, that equates to a high yield of 5.9%. Pocketing that kind of dividend on a regular basis, and compounding it over the long term, can really enhance your wealth.

Shell’s current dividend yield is almost double the average for the FTSE 100 (3.1%) and is over three times the yield you can expect to receive from the average cash ISA these days. So that has to be viewed as a positive. Having said that, Shell has not increased its dividend for several years now, which is not ideal from an income investing perspective. There are plenty of companies within the FTSE 100 that are increasing their dividends, and therefore may offer better inflation protection. It’s worth noting though that Shell does have a fantastic dividend track record and has not cut its payout since WW2.

Risks

Of course, the shares aren’t without risks. Another dramatic collapse in the oil price could result in the stock falling significantly. It’s also worth keeping the long-term threat of renewable energy in mind.

However, overall, I believe Shell shares offer an attractive investment opportunity right now. I own it in my own personal ISA and plan to keep holding the stock for the long term.

Buy-And-Hold Investing

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Edward Sheldon owns shares in Royal Dutch Shell B. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.