Over the past 12 months, the Shell (LSE: SHEL) share price has returned around 24%, excluding dividends. However, the stock has declined in value by nearly 10% over the past five years, excluding dividends.
I think this long-term performance showcases the company’s main issue.
Shell share price value
Even though the stock has outperformed the market over the past year as the price of oil has jumped, the business has struggled to build real value for investors over the longer term. This makes it quite challenging to assess how the investment may perform over the next five, 10, or even 20 years.
The current energy crisis illustrates how vital oil and gas is for the global economy. Still, making money in this business is more complicated than it seems.
Companies like Shell need to invest tens of billions of dollars every year in replacing oil reserves. This process can be incredibly expensive, and there is no guarantee of success.
At the same time, these companies now have to spend vast sums of money investing in green energy projects.
If they do not invest in these projects, they could be left behind. The world is moving away from using hydrocarbons as the primary energy source for vehicles and economies.
I think these are the reasons why the market has not been so keen on the Shell share price over the past few years.
That said, these numbers do provide a bit of a misleading picture.
Dividend income
One of the company’s most appealing features is its dividend. Until the organisation decided it was going to reduce its payout for investors in 2020, the stocks had one of the best dividend track records in the FTSE 100.
The shares now yield 5%. The company is also returning money to investors with share repurchases. Thanks to these cash returns, it has once again regained its position as a dividend champion.
Still, even including dividends, the stock has underperformed the market over the long term. Over the past five years, the stock has produced a total return of 1.5% per annum. That is compared to 3.5% for the FTSE All-Share index over the same timeframe.
Unfortunately, considering the company’s growing capital spending commitments and its need to reposition itself for the green energy future, I think this trend will continue.
The bottom line
If the business is having to spend money on new capital projects, it will not be able to return this cash to investors.
There is also no guarantee these new projects will provide profitable returns. The green energy industry is only becoming more competitive, which could push down returns on new ventures. Although, for the time being, the company’s legacy hydrocarbon businesses are still throwing off cash.
Nevertheless, despite these challenges, I would buy the stock as an income investment for my portfolio today, considering its current dividend credentials and share repurchase policy.
