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Shares in Shell are dirt cheap! Here’s what I’d do now

The Royal Dutch Shell (LSE: RDSB) share price has plunged in value over the past 12 months. Including dividends to investors, the stock has declined 21% over the past year. That suggests it’s underperformed the FTSE 100 by 20% over this time frame.

The sell-off has only accelerated in recent weeks. Over the past month, shares in the oil major have declined by nearly 11%, underperforming the UK’s leading blue-chip index by 4%.

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Investor concerns

There are a handful of reasons why this dividend champion has lagged the market recently. First off, falling oil prices have weighed on Shell’s earnings. According to recent trading updates from the company, profits dropped by more than 50% in the fourth quarter of 2019. This decline forced management to slow the pace of the group’s share buyback policy and put further cash returns at risk.

Unfortunately, it doesn’t look as if the business is going to get any relief at any time soon. Oil prices have continued to trend downwards since the beginning of 2020.

What’s more, the coronavirus has sent shockwaves around the global economy. As yet, it’s not clear what impact this will have on global oil demand. But initial indications suggest demand has slumped, and that’s terrible news for hydrocarbon produces.

Green energy

As well as falling oil prices and demand disruption, Shell is also under pressure from investors to increase its green energy spending. The company says it’s devoting around 10% of its annual capital spending budget to green projects. However, some analysts have speculated this might not be enough.

As well as this outlay, Shell is continuing to spend tens of billions of dollars every year on new hydrocarbon projects. There are growing fears the group could be throwing this money away as the world moves away from fossil fuels.

These worries are weighing on the stock price. Pressure from activists to get investment managers to divest fossil fuel holdings could also be having an impact.

All of the above have contributed to Shell’s recent share price decline. However, this could be an excellent opportunity for long-term income investors to buy a share of this global energy champion.

Long-term potential

While demand concerns are worrying, they’re likely to be temporary. When the global economy roars back to life, oil demand and the oil price should rise. On top of this, while there’s a genuine risk that Shell could end up owning billions of dollars of stranded assets, management seems to be taking action to minimise the risk of losses for investors.

Therefore, from a long-term perspective, Shell’s outlook doesn’t look as dismal as it does today. On top of this, right now you can snap up shares in the oil giant for just 9.2 times earnings. That suggests the stock offers a margin of safety at current levels.

The shares also offer a dividend yield of 8.5%, nearly double the FTSE 100’s, suggesting investors will be paid to wait for the stock to recover. Therefore, now could be a great time to take advantage of the market’s short-term outlook and buy Shell. 

A top income share with a juicy 5% forecast dividend yield

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Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

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Rupert Hargreaves 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.