The Royal Dutch Shell (LSE: RDSB) share price took a hit at the end of October after the company warned global economic weakness and persistent lower energy prices could hit shareholder returns. Accordingly, the stock has underperformed the FTSE 100 by around 3% over the past month.
However, I think this could be an excellent opportunity to snap up shares in this global oil giant and dividend champion at an attractive valuation. Indeed, while the stock’s recent performance is disappointing, I think investors should look past its short-term headwinds and concentrate on its long-term potential.
Struggling for growth
As one of the world’s largest oil groups, Shell currently has to deal with several headwinds. Climate change concerns are driving the world (albeit slowly) away from fossil fuels towards renewable energy, and the company is having to prepare for this environment.
At the same time, the shale oil boom in the US continues to weigh on oil prices, and this is reducing the group’s overall probability. The combination of higher costs as spending on renewable energy projects grows, coupled with lower income from its legacy operations, means Shell has to seriously reconsider its plans to return cash to investors.
According to the company’s chief financial officer, Jessica Uhl, if energy prices remain at the level they were throughout the third quarter of 2019 for the next 12-months, Shell’s cash flow could drop by as much as $9bn, putting the group’s $25bn share repurchase programme in jeopardy.
That’s disappointing. But it’s unlikely the cash flow pinch will extend to Shell’s dividend, and that’s good news for income investors. At the time of writing, the stock supports a dividend yield of 6.1%.
Look to the long term
Over the past few decades, Shell has built a reputation as being a dependable dividend stock. Despite the headlines currently buffeting the business, I don’t think this is going to come to an end anytime soon. Management has done a tremendous amount of work over the past few years reorganising the company for lower oil prices, and now its concentrating on positioning the business for a low-carbon world.
This transition won’t be painless. I think Shell is going to take a hit to profits in the mid-term as it devotes more capital to future growth but, in my opinion, this is the right course of action.
If the company doesn’t invest now for future growth, it could find itself having to play catch up at a later date, which would undoubtedly mean much more pain for shareholders.
So that’s why I would buy the Shell share price for my Stocks and Shares ISA right now. I think the company’s long-term potential is exciting and, in the meantime, investors can pick up that 6.1% dividend yield.
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Rupert Hargreaves owns shares in Royal Dutch Shell B. 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.