The FTSE 100 index has recovered fast from the stock market crash. It’s up 8% from March, the month of the crash. Clearly, this means that FTSE 100 companies’ share prices have gained as well. While that’s good news, making us investors heave a collective sigh of relief, there’s a downside here too. Bargain buys, that were a dime a dozen when the crash happened, are becoming increasingly hard to find.
But there’s one big FTSE 100 stock that’s in the doldrums, thanks to the ongoing recession, making it a great bargain buy in my view. I’m talking about the oil biggie Royal Dutch Shell (LSE: RDSB), whose share price has actually fallen since March. July is turning out to be its worst month in 2020. This shouldn’t surprise, though.
Recession drags down oil demand
An economic slowdown hits cyclical stocks in any case. Oil demand is dependent on growth in activity, so a slowing down in economic activity reduces it. The current slowdown is no different so far. If anything, it’s worse for oil companies. The lockdowns sharply reduced travel and business demand, with ripple effects across multiple industries, including oil.
This has shown up in RDSB’s financials. It reduced dividend payouts as the slowdown hit and more recently, it warned that the value of its assets could decrease a fair bit. This is bad news with oil prices expected to remain low. According to the International Monetary Fund (IMF), petroleum prices are expected to average $36.2 in 2020 and $37.5 in 2021. This is below the current $41 level.
Bargain buy for the patient investor
So why am I making a case for investing in RDSB at all? It’s because I believe that once the dust has settled and growth returns, Shell will come out ahead. It’s quite likely that it’s current share price will look like a bargain buy then. Think about this – Shell has been around for the longest time, and has survived multiple recessions.
Also, as the economy recovers, oil demand will rise. In fact, it may be one of the first leading indicators of growth. As people make their way back to regular office travel and the wheels of business, particularly industrial activity, start turning again, oil demand will rise again. Indeed, it already has, going by the inching up in oil prices. For investors with patience to wait a few years, it’s quite likely to be a bargain buy in hindsight.
Comparing with BP
Another way to think about RDSB’s future trajectory is to consider its FTSE 100 peer, BP, which has recovered since the stock market crash. There are differences between the two companies, of course. BP’s dividend yield, for instance, is more than twice that of RDSB’s, at 4.1%. RDSB’s dividend levels might have been looking hard to maintain even before the corona-crisis struck, but, BP’s is on thin ice too. With a big loss in the latest quarter its dividend can’t be depended on. Yet, its share price is in a healthy place while RDSB’s is struggling. In this context, RDSB appears to be a clear bargain buy.
