The stock market crash has thrown up some incredible opportunities across the FTSE 100. The Royal Dutch Shell (LSE: RDSB) share price is one of the most dramatic. It’s halved over the last month and now trades at a bargain bin valuation of 5.7 times earnings.
Shell’s fabled dividend has hit fantasy levels, with the yield an unbelievable 13.98%. Today’s rock-bottom valuation double-digit yield makes Shell a buy in my book, if you’re feeling brave.
While the coronavirus is responsible for most of the stock market correction, oil majors like BP and Shell have to contend with another monster-sized problem, the collapsing oil price. This is partly down to Covid-19 suppressing demand as people stop flying and driving to work. But it’s even more to do with the battle for supremacy between Saudi Arabia and Russia.
Oil market crash too
Both countries have launched a do-or-die price war and remain committed to flooding the market with oil. There’s been talk of crude hitting $20 a barrel, although it’s staged a rally in recent hours, lifting a barrel of Brent to around $32.
That’s lifted the Royal Dutch Shell share price as well, which is up a thumping 10% today, following a rise of almost 5% yesterday.
Don’t feel pressured into making a purchase. The combined coronavirus and oil price crises are far from over. Keep a cool head and examine the underlying business and market trends, before committing your money.
Shell is all about dividends
The Shell share price wasn’t exactly firing on all cylinders before the stock market crash. Many argued it was turning into a pure income play, with minimal growth prospects. The drive towards decarbonising the global economy squeezed its prime source of revenue. Shell was thought to be in a better position than BP though, having a greater focus on natural gas and renewables.
Shell has a famous record of never once cutting its dividend since 1945, an impressive 75-year run, while BP has cut just twice in the last 30 years. If it can maintain current payouts, those brave enough to buy the Shell share price during the stock market crash are locking into a massive future income stream.
On the other hand, Shell has a break-even price of $63 a barrel, higher than BP’s $53. I don’t see the oil price returning to those levels for a long time, unless high-cost suppliers go down in droves.
Royal Dutch Shell share price is a buy
Shell was anticipating $28bn-$33bn free cash flow this year, when oil stood at $65. That guidance has been blown to pieces. However, management has borrowed before to fund payouts, and I can see that happening again. The board won’t want the dividend record to end on its watch.
Its commitment will be tested more than ever. And if the coronavirus and oil price slump extend, something will have to give. Mind you, even slashing the dividend by half would give you 7% a year. I think the rewards outweigh the risks.
Harvey Jones 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.