Recent market volatility has made investors more selective as to which stocks to add to their portfolios in 2019. If you believe in holding shares for the long term, I’d suggest that you take a closer look at Royal Dutch Shell (LSE: RDSB) shares.
Strong management and diversification
The global energy group has diversified businesses that include oil drilling as well as refining and chemicals. In 2015, when it purchased BG Group, Shell became a leader in liquefied natural gas (LNG) too. Many analysts now regard that acquisition as a major first step that put the group in a strong position to capitalise on the overall increase in global energy demand.
Its management is building the company’s future on three segments:
• Integrated Gas, a play on the evolving energy needs of emerging markets
• New Energies, its vision on a low-carbon future
• Global Deepwater Plays, such as the investments in the Gulf of Mexico and Brazil
The short-term fortunes of Shell shareholders have always been closely linked to the price of oil. In summary, higher oil prices help to increase revenues, cash flows, and profits. Therefore volatile energy prices made 2018 a rough year for the shares.
Yet investors should note that the group has a target break-even price of $40 a barrel in deepwater exploration. Since the oil price crash of 2014, its management has cut costs aggressively, helping profit margins improve. Therefore, even if the slump in oil prices continues well into 2019, the company’s profitability should not come under real threat.
Its forward P/E ratio, which values the shares on Shell’s expected future earnings, stands at 10.2, making it reasonably priced for new investors who may think of hitting the ‘buy’ button.
Reinvesting the dividend yield
Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. The group’s dividend yield is over 5% — another important reason why I think the shares belong in a capital-growth portfolio.
It has paid dividends regularly since World War II, including during the big oil price slump of 2014-17. and I believe that the company will continue its position as a reliable high-dividend staple.
Should you still worry about Brexit?
But are there any problems ahead for the firm? Over the past two years, the political discourse on Brexit has dominated business and public life in the UK. In September 2018, Shell’s UK Country Chair Sinead Lynch said that for the firm, “there’s no existential threat around Brexit. There is however aggregation of additional costs, administration, complexity” for the industry.
Although a disorderly Brexit on 29 March could affect RDSB shares due to a broader market sell-off, I believe that such a reactionary decline would be short-lived for this global energy giant. In the medium-to-long term, a no-deal Brexit is not likely to have a significant detrimental impact on the business model or share price of such a globally-focused business.
The bottom line
2019 may bring further volatility to the stock market, and I would not advocate bottom-picking. However, the long-term growth trend of Shell makes its shares a buy candidate, to me, at current levels.
Despite concerns about the price of oil, its management is committed to cutting costs and growing revenues, and the company’s fundamental story remains intact. As a buy-and-hold investor, you would collect over 5% in dividend payments, beating returns on many other investments.
