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Why I think this jewel in Royal Dutch Shell’s crown makes it a buy today

In addition to packing hefty dividends for shareholders, stocks in the utilities sector have traditionally been reliable, yielding slow but steady growth over the longer term on investment.

In Q2 of this year, the FTSE 100 was boosted by the strength of the shares in utilities, where market uncertainties left many other sectors falling in value.

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However, Royal Dutch Shell’s (LSE: RDSB) acquisition of First Utility in December last year was met with enthusiasm by investors seeking to purchase utilities shares without relying on the major six market players in the UK to enter the sector.

Initially, Shell’s acquisition promised enhanced profits and a greater market share nationally, building on the 825,000 homes served by First Utility at the time for their gas, electricity and broadband provision.

Big promises

Following the acquisition, First Utility’s directorate were immensely positive about their future market capture, making claims that the organisation was now in prime position to begin capturing a corner of the market.

However, enthusiasm was dampened as we saw the collapse of regional supplier Future Energy at the beginning of 2018, prompting strong debate as to the profitability of the UK’s household energy market.

Wholesale prices spiked, and gas & electricity provider Brighter World Energy soon followed Future Energy and folded. For a while, it seemed that even backing by a powerhouse such as Shell couldn’t provide First Utility with the resources required to compete with the big players such as npower and E.ON.

Market fluctuation in energy prices went on to see First Utility register a FY16 pre-tax loss of £12.7m, leaving many investors doubting whether the firm could regroup and return to profitability; however, in FY17 First Direct recorded a pre-tax profit of £29m.

An uncertain start stabilises

Against the odds, Shell’s acquisition has seen First Utility begin to make a profit once more, despite the ongoing market uncertainty and fierce competition from bigger players.

Brexit uncertainty and slowed economic growth could enhance dividend yields, despite First Utility failing to deliver on anticipated market share to compete with the big six power firms. This is why I feel confident that Shell’s acquisition could still be a savvy step for the firm.

Minor setbacks have still shaken the stability of the firm, with recent criticism from Ofgem relating to the organisation’s poor complaints management, further undermining investor confidence.

However, I suspect Royal Dutch Shell is still a positive prospect for long-term investment, as First Utility benefits from Shell’s acquisition and expertise. This could be a sensible investment, as Shell seeks to capitalise on the positive reception for industry contenders capable of challenging the ‘big six’ utilities market leaders.

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Jen Syrkiewicz has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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