Long-term investors have a thing about FTSE 100 giant Royal Dutch Shell (LSE:RDSB). Whatever you may think of the green renewable revolution it won’t be instant and the world will still need oil for some time.
Take, for example, research by the cross-governmental International Energy Agency. It says while demand for renewable energy is on the rise, fossil fuels will still remain a significant part of the energy mix.
In fact, its 2019 World Outlook predicted that by 2040 oil and gas would still make up 74% of all energy generation.
Shell’s long-term strength puts it in prime position to keep producing solid dividends from the industry over the next 20 years.
Short-term fall
The cratering oil price in the past week – a consequence of coronavirus-induced lower demand – has certainly hurt the Shell share price. In response to the viral outbreak, OPEC (Organization of the Petroleum Exporting Countries) revised down its global demand forecast by 200,000 barrels a day for 2020.
Those covering the oil industry have a tendency to go a little overboard with their descriptions. I read one article about oil prices in the short term that claimed there would be “severe demand destruction“. The piece went on to say that analysts had predicted oil prices would recover by summer 2020.
Saudi Arabia has since called for a production cut of 600,000 barrels a day. And even with a drop on this scale, oil prices could remain weakened until April, analysts suggest. That said, a couple of months of weakness is nothing to long-term investors.
Think 10 or 20 years ahead and you’ll get a better sense of whether an investment like Shell represents good value.
That near-9% dividend
At the current share price the dividend yield is a sky-high 8.8%. By my calculations it would take less than nine years for an investor to double his or her money if all dividends were reinvested.
As I’ve said before, it’s easier to get serious compound gains over time from higher-yielding companies. Shell is ex-dividend at the moment. It’s one reason why the shares slid 5% as the end of the week approached.
Some investors will invest in high-yielding companies just before the dividend date. There’s nothing wrong with this. But it’s more work than I’m willing to do, to be honest, working out ex-dividend payment dates.
I’d rather dig into a company’s balance sheet and its prospects for the future to figure out whether I’m willing to put it on my watchlist. Once there, it has to cut its dividend, make management mistakes, or report a long-term drop in earnings or profits to come off my list.
I’m not even too concerned about Shell’s recent set of results. Chief executive Ben van Buerden said Shell had produced a “competitive cash flow performance” across the year. With a price-to-earnings ratio around 10 and the share price now hovering at levels we’ve not seen since May 2016, Shell still remains a buy for me.
