Many pandemic-affected FTSE 100 stocks have bounced back in the rally since November 2020. Not oil stocks, though. The Royal Dutch Shell (LSE: RDSB) share price is still 35% lower than it was last year at this time.
I reckon, however, that oil companies like RDSB are in for better times at the stock markets in 2021.
Here are three reasons why:
#1. Global recovery and lockdown lifts
I think 2021 is going to be a year of recovery for a number of reasons. Vaccinations are underway, marking the beginning of the end to Covid-19. US-China relations could be less hostile this year. And an amicable Brexit deal has been achieved.
Even though companies’ financials are weak and public debt is ballooning, I reckon growth is about to kick in. Additionally, as lockdowns ease, we will be able to travel more freely.
Both higher growth and lifting of lockdowns will increase oil demand, which was been hurt in 2020. This is good news for FTSE 100 oil stocks like RDSB.
#2. High liquidity and bargain buys
The massive quantitative easing that took place to reduce the blow from the pandemic has buoyed equity markets around the world. The UK is no exception.
With easing unlikely to be withdrawn anytime soon, and investors feeling bullish, I think it’s quite likely that the stock market rally will continue. As share prices get chased up, investors look for still-low-priced stocks to buy as bargains. I think RDSB is one of them.
#3. Profits and dividend increase for RDSB
Shell’s profits have taken a sharp plunge this year. For the full-year 2020, its profits are one-fourth of what they were last year. But in a poor year for oil prices and demand, I take solace in the fact that the oil biggie has actually managed a profit.
It would appear that Shell is also optimistic about its prospects, going by the dividend increase it announced earlier this week. After it cut dividends last year in April, it has increased them twice since. There’s a chance that it may do so again.
RDSB is one of the most stable dividend-payers among FTSE 100 companies. I reckon that unless there’s another severe disruption like Covid-19, we can expect a passive income from the stock to continue. For this reason, I think it’s going to be a draw for income investors this year. It has a 4% yield right now, which isn’t bad.
Risks ahead
The above might make the RDSB story seem all roses and honey from here, but it isn’t. As they say, if it sounds too good to be true, it probably is.
This cheap UK share comes with its risks. The biggest one is the increasing shift away from fossil fuels to more climate friendly ones. The star of electric vehicles is on the rise, which means lower long-term demand for oil.
How will oil biggies like RDSB manage this change? That remains to be seen.
The takeaway
For that reason, I’d consider buying this cheap UK share and holding it for the next four to five years, and re-assessing evolving trends. Till then, I expect to have seen an increase in my capital and earned a passive income as well from this investment.
