As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 25 shares of Royal Dutch Shell plc (RDS.B) on 7/3/13 for $65.82 per share.
Royal Dutch Shell plc doesn't get a lot of press here in the U.S., but it's important to remember that this company is the second biggest company in the world in terms of annual revenue. It's revenue was over $481 billion last year. That's pretty huge. Royal Dutch shell is a vertically integrated oil and gas company with substantial global upstream and downstream operations. They operate in over 70 countries, and have over 44,000 service stations.
Although this wasn't my first oil supermajor pick, I finally decided on RDS.B for a number of reasons. First, the lackluster performance in the shares YTD. RDS.B is down a full 7% (before dividends) YTD as of today, while the S&P is up 13.26% YTD. That 20% spread is pretty attractive from a value perspective. I don't know if shares are going to bounce back or not and to be honest I really don't mind. If they stay suppressed at these levels I'll be a very happy net buyer of further shares to build my ownership position in the company. I picked up shares at a level that's only $.80 higher than the 52-week low.
The yield is pretty strong here. My purchase gives me an entry yield of a full 5.5%. That's higher than a lot of utilities out there, and that's backed by a company that isn't bound by the type of anemic growth that utilities can sometimes come attached with. Based on the current dividend payout of $.90 per quarter, I've added $90.00 to my annual dividend income total.
What's not to like, right? Well what I believe is keeping shares cheap here is Shell's large exposure to natural gas and the price weakness natural gas has had over the last few years. Over a third of its profit comes from the liquefied natural gas operations and about half of their production was natural gas last year. They're making some huge bets on natural gas right now and is actually increasing its attention in that direction and away from oil. They want to be the world leader in L.N.G. production and supply and are making big strides toward this goal. It could hamper profits in the short-term, but could also lead to really strong growth in the future as energy use starts to move in this direction. Currently, margins are much lower than peers due, at least in part, to the large concentration on L.N.G.
Shell is one year into their current 4-year plan to deliver $175-$200 billion in total cash flow from operations, a net capital spending program of $120-130 billion, and a competitive dividend for shareholders. The CEO,Peter Voser, states the company is on track to meet all of these objectives. Shell is one of the biggest dividend payers on an absolute basis, so from an income investor's standpoint this is an attractive company to invest in. Shell announced approximately $11 billion in dividends during the year of 2012.
Shell hasn't been growing the dividend in spectacular fashion over the last five years. The dividend payment on the ADR shares remained at $0.84 per share quarterly from 2009-2011. The company raised it to $0.86 per share quarterly in 2012 and then again to $0.90 per share quarterly in 2013. I hope this is the beginning of a trend, as Mr. Voser seems quite keen on growing the payout to shareholders. From the best I can tell, the dividend remained static after the price of oil plummeted from 2008-2009 and then during the Great Recession. Although in absolute terms, RDS.B would have paid much more dividend income out than every other supermajor during the last five years. The great thing is that even with this high yield, the dividend is well covered with a 43% payout ratio by earnings and is also comfortably covered through FCF.
I valued the shares using my typical Dividend Discount Model, although I used lower dividend growth numbers than usual to factor for the higher yield and lower historical growth of the payout. I typically use a 7% growth rate which is fairly conservative, but this time I used a 5% rate. With a 10% discount rate I get aFair Value on shares at $75.60. I think a case could be made that shares in Shell right now are attractively valued with a higher-than-average entry yield. The balance sheet is very clean and the growth projects are really humming as Shell continues to focus on L.N.G. I think the future looks fairly bright for Shell, and brighter than the recent past has been. Obviously the price of crude oil has a large impact on Shell's revenue and profits, even factoring in the focus on L.N.G. Most of Shell's predictions factor on a $80-$100 price point for a barrel of oil, so this is something to monitor.
I currently have 37 positions in my portfolio after this purchase, as this was a new investment.
Some current analyst opinions on my recent purchase:
*Morningstar rates RDS.B a 4/5 star valuation with a Fair Value estimate of $79.00.
*S&P Capital IQ does not currently track RDS.B.
I'll update my Freedom Fund in early July to reflect my recent addition.
Full Disclosure: Long RDS.B
What are you buying?
Thanks for reading.