In Retrospect: Royal Dutch Shell

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I look back at our three purchases of Royal Dutch Shell.

Royal Dutch Shell_logo

On August 26, 2015, December 16, 2015 and June 22, 2017 we bought a total of 560 shares of Royal Dutch Shell at an average price of €22.00. In total, we paid €12,318.00 plus €40.95 in order fees.

What is Royal Dutch Shell?

Royal Dutch Shell – or Shell for short – is one of the largest oil and gas companies in the world. Its story dates back to the mid-19th century, when it started selling sea shells in London.

Today, Shell is headquartered in the Dutch city of The Hague. As one of the world’s leading energy companies, it has operations in more than 70 countries. The company is divided into 3 business units:

  • Upstream (exploration and production of natural gas and crude oil),
  • Downstream (refining, shipment and trading of crude oil and production and distribution of products such as fuel, heating oil and lubricants) and
  • Integrated Gas (business with LPG and renewable energies).
Royal Dutch Shell Earnings 2017 in bn US$
Royal Dutch Shell Earnings 2017 in bn US$

However, the shale gas boom in the US has led to a rapid shift in the global balance of energy resources. Faced with its dwindling market power, the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, started a price war against the American shale gas industry. The subsequent oil price decline only ended in early 2016 at a price of less than $30 per barrel, which put all oil majors – including Shell – in dire straits.

Chart Crude Oil Brent
Chart Crude Oil Brent

On top of that, while oil prices were still in decline, Shell announced its plan to acquire BG Group, the third-largest British energy company. With the acquisition of the LNG specialist, Shell intended to shift its focus to gas and become less dependent of its own oil business.

To handle the $70 billion transaction as well as to overcome the general market weakness, Shell launched a rigorous austerity program. This included, above all, the streamlining of its own portfolio, including the sale of $30 billion in assets. In return, more profitable business areas are supposed be strengthened. For example, Shell is now planning to invest $1 to $2 billion in renewable energy projects per year.

Why Royal Dutch Shell?

When we first decided to buy Shell’s stock in August 2015, the oil price decline was still in full swing. However, Shell’s share price had already plunged by more than 30% within a year and was close to its 5-year low.

Whereas the slump seemed justified given that the oil price had just been cut by two thirds, Shell’s dividend yield also rose to 8%. Of course, nobody knew for certain for how long Shell would be able to maintain such a high payout during a long-term crisis. However, the company had not cut its dividend since World War II. And it was precisely Shell’s unmatched dividend history which let us open our first position while the crisis was still on-going.

How did our investment in Royal Dutch Shell turn out?

After having acquired our first shares in August 2015 (160 shares at €22.00), we added further shares in December 2015 (200 shares at €20.00) and June 2017 (200 shares at €24.00). Today, we own a total of 560 shares of the British-Dutch oil and gas giant.

In retrospect, Shell’s stock price performed very well since our first purchase. The increase from our average purchase price (€22.00) to the current share price (€30.00) means a price appreciation of 36.4%. In addition, we already earned more than €1,600 in dividend income.

Chart Royal Dutch Shell
Chart Royal Dutch Shell

Is Royal Dutch Shell’s stock still worth buying?

But should you still buy Royal Dutch Shell’s stock today? That I want to show you based on our stock screener. So, let’s go!

How cheap is Shell?

I think a company’s stock is cheap if its current price-earnings ratio (PER) is lower than its average PER (since 2004). In case of Shell, current PER is sitting at 21.6. This is more than its long-term average PER of 13.3.

Royal Dutch Shell Factor 1
Royal Dutch Shell Factor 1

Therefore, Shell’s shares are currently significantly more expensive than usual. I grant 58.9 minus points.

How strong is Shell?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of Shell, the lower of the two growth rates is -12.6% p.a. The company’s medium and long-term earnings growth is negative.

Royal Dutch Shell Factor 2
Royal Dutch Shell Factor 2

Therefore, Shell seems to be a fairly weak company. I grant another 12.6 minus points.

How robust is Shell?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of Shell, the maximum year-on-year drop in profits was 85.6% (FY2015). However, the company didn’t report any loss over the entire valuation period.

Royal Dutch Shell Factor 3
Royal Dutch Shell Factor 3

Therefore, Shell does not seem like a very robust company. I grant another 24.4 minus points.

Is Shell currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of Shell, due to its robustness I would allow a PER of 8.4. This is less than its current PER (21.6).

Royal Dutch Shell Factor 4
Royal Dutch Shell Factor 4

Therefore, Shell’s stock seems to be no bargain now. I grant another 43.6 minus points.

Jung in Rente Score

The result of our stock screener – the so-called “Jung in Rente” score (JiR score) – is simply the sum of a company’s bonus and minus points. In case of Shell, that leads to a JiR score of -139.5 points.

Royal Dutch Shell Jung in Rente score
Royal Dutch Shell Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

With a JiR score of -139.5, Shell is currently not recommended for further purchases.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

Royal Dutch Shell Dividends
Royal Dutch Shell Dividends

Up until now, Shell pursued a very investor-friendly dividend policy. The British-Dutch energy company has not lowered its dividend over the entire valuation period. At present, Shell pays out about 121% of its earnings, which is equal to a dividend yield of 5.2%.

Conclusion

Due to its very high dividend yield as well as its impressive dividend history, we added Royal Dutch Shell to our portfolio three times since 2015 at an average price of €22.00 per share.

In retrospect, it paid off to invest in a large oil and gas company during one of the sharpest drops in oil price that the world has ever seen. However, it’s not only the book profit that is worth mentioning here. We’re also earning a significant amount of dividend income, which, by now, already accounts for more than 13% of our acquisition costs.

However, although the recent oil price rally sent Shell’s stock close to a new all-time high (€32.50), the oil spike is not yet fully reflected in the company’s financials. That’s why the stock currently appears to be overvalued according to our personal stock screener. So, I guess we won’t be adding any further shares to our existing position any time soon.

What do you think about investments in the oil and gas sector and Royal Dutch Shell in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

2 Replies to “In Retrospect: Royal Dutch Shell”

  1. That’s a very informative post. It would be really interesting to know more how you came up with JIR score as I am also looking forward to create my own stock scanner as for now I buy shares quite chaotically.

    1. Hi GNB,

      Thank you very much for your comment! As several of our readers expressed their strong interest in our JiR score, we are going to come up with a detailed review of our valuation methodology shortly. I kindly ask you for a little bit more patience.

      – David

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