There’s an old maxim in the wealth management business that no one ever lost money investing in Royal Dutch Shell (LSE:RDSB) shares. No matter how excited young analysts get about the next big thing in battery metals, cloud data storage or AI, they would still recommend buying Shell shares. That’s because the Anglo-Dutch giant has offered predictable dividend income since 1945.
But could the tide have turned on Shell shares for good?
It came as a massive market shock to see the CEO Ben van Beurden cross the Rubicon and slash the dividend in 2020. Suddenly Shell shares didn’t seem so bomb-proof any more.
Shell shares the blame
As Reuters reported in September, Shell is now undergoing a painful $5bn cost-cutting programme to refocus its business model on renewable energy and low-carbon tech. Could the turnaround have come a few years too late?
Oil isn’t going away as an industrial fuel, no matter the headlines around greener technologies like solar, wind, biofuels or hydrogen. But the margins will likely be much lower than they were. And that means fewer profits for Shell to play with.
Analysts have been warning for a while that Shell’s debt-heavy balance sheet was strained. But these fears were dismissed because the company seemed to be making its shareholders rich over time.
Debt weighs it down
Shell is putting strict targets on its business model to reduce net debt from $73.5bn to $65bn. In happier economic times, massive debt piles like this didn’t seem like much of a problem. After all, Shell shares were solid, and it had the market’s confidence.
But in April a trio of the world’s most powerful investment banks and ratings agencies — Morgan Stanley, S&P and Fitch — downgraded Shell’s debt. That means it will cost more to borrow money in the future.
It took a global pandemic to really shine a light on the creaking areas of Shell’s business. There’s no going back now. The veil has been lifted and its weak underbelly has been exposed.
In late October van Beurden announced a new plan to reduce Shell’s debt and increase payouts to shareholders. “Ongoing work to reshape Shell’s portfolio is expected to deliver continued cash generation,” the multinational said.
The main takeaway is that Shell shares will now be subject to a progressive dividend policy. So its board will look to grow dividends per share by 4% per year, with a target to distribute 20%-30% of cash flow from operations to shareholders. This will be done with a combination of share buybacks and dividends.
But I think the long-term structural problems for the company outweigh these positives. I don’t always agree with City analysts who seem to think that this is enough to recommend Shell again now.
Shell seemed like such a good investment in the past because its dividend yield was nearing double-digits. At such a high payout, with all dividends reinvested, investors could have doubled their money in under a decade.
And I’ll admit I was a little too taken with the 8.8% dividend yield on offer back in February. That’s greed for you. I’ve since sold out of my Shell shares. I think there are better long-term options on the table elsewhere in the FTSE 100 and FTSE 250.
TomRodgers 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.