Wednesday, 8 April 2015

BUY: Royal Dutch Shell "B" (RDSB)--Betting BiG on the BG Bid?

Price: 2099.45
Shares: 30
Predicted annual dividend income: £37.77

I have had some money sitting in my ISA brokerage account for a few days now. I was hopeful that maybe Bloomsbury or BAE Systems would start showing a 4% predicted yield for next year again. They haven't yet.

However, two megacaps I already hold and I have been still watching have also still been catching my eye: Royal Dutch Shell and HSBC.

This morning it was formally announced that Shell was looking to purchase fellow FTSE 100 oil major BG Group. As a result, its shares plummeted over 5%.

It was already bobbing along near its 52 week low so it all seemed a little too tantalising. So I dived in and doubled-up on my holding which I first bought into earlier this year.

This is a bit of a risk. However, I think it is a comparatively "safe" risk (if such can exist). Let's look why.

Uncertain Value

It must be said, with the impact of low oil prices still hammering their bottom line the value that Shell offers is a little unclear. If we look at the predictions for this year this is what we get:

EPSP/E Ratio
Difference (%)173.20

This is where we see the benefit of looking at future EPS (and thus P/E values) using the range of predicted values rather than just the consensus.

Clearly, analysts are--understandably--unsure of Shell's profitability going forward. The difference between the highest and lowest predictions is rather staggering. 

Of course, oil companies always attract wide-ranging predictions due to their inability to control the price of oil. But this is particularly acute. 

For next year, things are anticipated to improve somewhat:

EPSP/E Ratio
Difference (%)119.86

Here there is clearly still predicted to be some fairly hefty growth. I personally think that these predictions will be revised down somewhat in the coming months (unless the oil price rises). Nonetheless, it predicts that we should be heading in the right direction from next year.

Excellent Dividend?

Of course, if there is one thing people know about Shell it is their dividend record. It has grown or been held since the Second World War. Certainly, that is a superlative record. 

What is more, it is clear that Shell are aware of the powerful influence this has on their reputation: "Never sell Shell," they say. But with oil price still low and the BG Group bid in the pipeline (pun very much intended) many agree that it will continue to be under pressure for some time. 

However, it does not appear to be imminently under threat. For instance, Shell confirmed this in their BG Group announcement:
Shell today confirms its intention to pay dividends of $1.88 per ordinary share in 2015 and at least that amount in 2016.
Assuming that the $1.88 yield is maintained as stated (and the USD/GBP foreign exchange rate remains static) this should represent a yield of 6%.

Clearly a little growth would be welcomed. However, in this environment a static and very high yield is equally welcomed!

There is the excellent bit out of the way. What about the edgy part?

Edgy Dividend?

Well, assuming consensus EPS predictions the dividend should be covered  1.25 times by earnings this year and 1.6 times next year. Not too bad (from next year at least).

However, the lower estimates would suggest it not being covered at all for this year and next.

Does this increase the chance of its being cut? Of course it does, yes. However, I think it unlikely.

First, their Second World War record is rather sacred at Shell and so would only be cut down when absolutely necessary.

Second, nothing shouts out that it is absolutely necessary as yet. It has a very low debt/equity ratio of just 0.25 (to put it in perspective, BPs is much higher at 0.71 but still not awful).

What is more, they have huge reserves of cash. By my calculations about 228p per share. Even with the BG cash leaving their books this is a comforting reserve.

Shell and My Goals

Obviously, Shell does rather well for my goals for 2015 at present. Its 6% yield will help me achieve my 4% portfolio target for the year.

Similarly, the additional £37 or so expected in dividends should edge me yet closer to my £800 dividend total target for the year.

Shell also has a low Beta of about 0.68. This means it should contribute nicely to my target of a portfolio Beta of 0.85 or less. 

Also, being a larger purchase the proportion of my transaction today paid out in fees is 1.29%. This should help me achieve my target of 1.3% or less for the year.

A Good Choice?

Overall, RDSB is not in an entirely happy place at the moment. Things may get worse before they get better. However, it has dealt with worse in the past and got through.

That is a key point. This is an industry in which such body blows received by the oil majors are expected and--in most cases--planned for in one way or another. 

It is a huge, stable and well managed company in a sector which is scarcely likely to disappear overnight. Over the long run I suspect that oil prices will rise and profitability and growth will return. In that climate the BG purchase (and my RDSB purchase) should hopefully look a very good one. We will see!

However, in the meantime I have gone into this buy with my eyes very much wide open to the threats posed to Shell. They have some tough times ahead, for sure, but they also have some much easier ones too.

What do you think?

Have you been tempted by any of the oil majors recently? Do you think this is a good time to invest before things improve and their share prices begin to rise steadily again?

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[Creative Commons image reproduced from Flickr user .Shell]


  1. I have been tempted to add to my position in Royal Dutch Shell B on this downturn but have so far resisted. If it trades below US$60 again I may be adding to my position. The stock has a great current yield and once this low oil cycle works itself out eventually, they will be on firmer footing.

    1. I know what you mean. I suspect the low price environment will last some time (rather like that for iron ore and other commodities). But these integrated oil megacaps know how to deal with these sort of circumstances (as they have proven time and time again). As such, it does seen a good time to jump on board again!

      It certainly does have a super yield and comparatively well covered. I will be watching it though.

      The BG deal seems very canny from a long-term perspective. Clearly it stretches its finances a little more in the short term but seem a solid decision going forward.

      Thanks for dropping by with your thoughts! Let's hope it drops below $60 for you soon!

  2. Hey man, great purchase, Not to brag but I set a limit order for a 30 day purchase if it hit £20.01 - which it did this afternoon, so I am chuffed. I was all set just to press 'buy' when I saw it touching £21, then I thought NO, go cheaper, so I set a limit order.

    The last time I did that, I did it wrong and ended up selling San Leon Energy before I meant to, so I'm really glad I got it right this time!


    1. Very, very jealous. I took a punt yesterday with the 2099 purchase. I thought it could either drop much further or rocket back up even beyond what it was trading on pre-announcement. As it was below my original purchase price I thought it worth doubling up then!

      I have still not experimented with limit orders yet. It is something I am planning to start playing with soon!

      Do you mean you set sell instead of buy? That would be so annoying!

      I am tempted to add a little more if it continues to sit low. I really do think this deal looks very canny indeed. We will see! If it drops below £20 I will definitely have another look!

      Glad you managed to get another bite of the RDSB pie! Here's to another 70 years of consistent dividend growth!

  3. I typed in the wrong price and sold too low. Luckily, I got my money back, but it wasn't exactly how I planned...

    RDSB would have to fall at leats another £1 for me to look at adding any more. I do think their dividend is fairly safe. They have a lot less debt that BP and they have more revenues coming from natural gas, even without the potential influx from this deal (if it goes ahead). If it doesn't go ahead, then we just got an even better deal than we thought!

    1. It doesn't sound ideal! How did you get your money back? Did you just repurchase it? i had never heard of San Leon Energy before. I have to admit my oil world is limited to integrated oil majors. Explorers are a little too much for me!

      RDSs debt is certainly low for such a company. What is more, they have large reserves of cash which should help tide them over for a while even with the BG deal.

      The LNG deal is the most attractive part of the buyout. It is an interesting pointer as to where RDS are looking to shore up their income.

      What is more, as has been shown recently. BG was very good at exploration but failed with its exploitation of its reserves. In contrast, RDS was excellent at exploiting their reserves but their exploration has been a little lacking. It does seem a very good tie up.

      To be honest, I think you're right. Under £20 I would start looking at them again. However, unless nothing else was attractive at the time (which rarely happens) I would be rather loathe to add more right now. It is now my 5th biggest holding (about the same as Diageo). However, another hefty drop and it may be too good to ignore!

      Unless something significant changes I don't see the dividend seriously threatened. They are well financed and they could easily load up with a little more debt to tide them over if necessary. Not ideal, but plausible.

      We will see how it develops!

      (PS: Bloomsbury has gone on a bit of a run this week. I almost pulled the trigger on Thursday last at 150p. Then from Tuesday they have been up, up, up!)

  4. I got my money back because the sale covered the costs and the original money, but the plan was to sell when it increased in value.

    1. I see. That straightforward! I will investigate the process a bit more soon.

  5. I think Shell is probably a reasonable choice. I sold it last year at 2,500p but it's been drifting lower ever since and I may pick it up again soon. I think there's a good chance you'll do okay with this holding over the longer-term.

    1. I was looking at RDSB around about the time you were selling but felt it was likely to travel south at some point.

      I went for BP in the end which was, actually, quite a good choice. Although of course also hit by low oil prices it was already so depressed it did not affect my holding too dramatically!

      Yes, I think in the long run things should improve. Though short term it looks a little rough and medium term I am still not really certain about. We will see!

      Even if they do think it right to cut the dividend (which I still think feels unlikely) we should be paid comparatively handsomely for being patient!