Today I’m asking a simple question: should share investors consider better splashing the cash on Royal Dutch Shell (LSE: RDSB) today?
With the share price at around £23.30, investors can get hold of a whopping 6.4% dividend yield, one which leaves the FTSE 100 forward average of around 4.5% in its wake. And this reading lasts all the way through 2020 thanks to City predictions of annual rewards of more than 188 US cents per share for both this year and next.
But this isn’t all. At recent prices the share price also offers a price-to-earnings ratio of 13.5 times, which sits below the Footsie average closer to 15 times. Despite these alluring readings, though, I for one won’t be buying into the fossil fuel giant.
Shell’s stock was sharply sold off in August and buyers have failed to pile back in, and no surprise given the worsening outlook for the global economy for 2020 and therefore the patchy oil price picture.
Frightening forecasts
Latest research from UBS has certainly done market nerves no favours, either. It said that “strong supply growth in non-OPEC states amid weak global demand growth” should push the Brent benchmark steadily lower in the first half of 2020 and result in a $55 per barrel price by June.
On the plus side UBS expects prices to creep steadily higher in the latter half of next year on the back of improving demand, strong OPEC and Russian compliance with agreed production cuts, and the prospect of subdued non-OPEC production growth (excluding the US) in 2021. It’s worth noting, however, that the bank’s boffins still only expect Brent to reach $60 per barrel by next December, still down from current levels above $63 per barrel.
It looks, then, that City predictions that Shell will recover from a predicted 18% earnings drop in 2019 with a 21% bottom-line jump in 2020 are built on pretty shaky foundations.
Profits dive
The oil colossus has already jangled investor nerves in recent days with news that earnings (on a current cost of supplies basis) slumped 15% in the third quarter to below $4.8bn, a result which the firm said reflected “lower realised oil, LNG and gas prices” on top of lower realised refining and chemicals margins.
On the plus side for income chasers, though, the fossil fuel play has the balance sheet strength to meet those bulky dividend forecasts for 2019 at least (free cash flow sat at $10.1bn for quarter three). And in that trading statement, chief executive Ben van Beurden affirmed that Shell’s goal of buying back $25bn worth of shares by the close of the year remains unchanged, as does its attempts to keep paying down debt.
I can’t help but fear for Shell’s profits outlook and its ability to keep paying blockbuster dividends, not just in 2020 but further out as global investment in fossil fuel production grows. It’s why I’d rather park my hard-earned cash in one of the FTSE 100’s other big-yielding shares.
