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Why I Like Royal Dutch Shell and Its 6.6% Dividend Yield

Multiple factors make this an opportune time to buy into the stock

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Jan 03, 2020
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Royal Dutch Shell PLC (

RDS.A, Financial) (RDS.B, Financial) is a profitable energy company in a trustworthy jurisdiction. The company is attractively valued compared to competitors. According to GuruFocus data, the stock trades at an owner/earnings multiple of 7 that comes close to Russian and Canadian companies. Those are markets that are extremely out of favor. Royal Dutch Shell also trades at one of the lowest enterprise value-to-Ebit numbers out there, and at a terrific price to cash flow ratio of 7.7.

Though the company's valuation is attractive, so are many of its peers. GuruFocus tracks the relative attractiveness of sectors within the S&P 500, and energy is a clear standout:

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Geopolitical tension

According to a Jan. 3 article in the Wall Street Journal:

"President Trump ordered a U.S. airstrike that killed Maj. Gen. Qassem Soleimani, leader of the foreign wing of Iran’s Islamic Revolutionary Guard Corps, in an attack that is expected to stoke heightened tensions between Washington and Tehran and inflame frictions in the volatile Middle East.

Gen. Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region, the U.S. Department of Defense said Thursday night."

This is a major incident that has already driven oil up 4%. It follows a recent alleged Iranian strike on Saudi Arabia's energy infrastructure that took out 5% of global oil production within one day.

The oil market has not shown any sustained risk after these incidents, and prices have remained relatively subdued.

At the same time, the innovation of shale production has turned the U.S. into a major energy producer as well as a swing producer. The U.S. shale industry can take production online or offline in rapid fashion.

This has served to curb global enthusiasm for major oil and gas exploration outside of the United States. Very few companies are aggressively pursuing reserves, and many oil companies are even trying to shed assets.

Shipping regulation

The International Maritime Organization  regulation limiting marine vessel sulfur exhaust to 0.5% (dubbed IMO 2020) went into effect on Jan. 1. Shipping companies can deal with the regulations in various ways like slower steaming, using lighter fuels or installing scrubbers.

In terms of who profits from the new rules, the winners are specific shipping companies that prepared well for the change, as well as refiners and fuel storage firms that are selling the picks and shovels to this industry.

Bloomberg published that Royal Dutch Shell profited as much as $1 billion from IMO 2020 near the end of 2019. The publication ascribes Shell's success to its sizeable trading organization, the spread between high and low sulfur fuel oil that completely blew out and the company's highly complex and capable downstream organization. That makes the company very flexible in the type of fuel it can output.

Outlook for Royal Dutch Shell

Shell has warned about its near-term outlook and foresees a global slowdown. It has a huge $25 billion share buyback program (over 10% of equity) outstanding, but said there was a possibility it would not be executed as fully as promised before the end of 2020. Since that time, however, oil prices have held up better than expected, and Shell passed on an acquisition of a utility against other bidders. The company also cut capital expenditure forecasts by $5 billion and is selling some Haynesville assets.

By my estimate, Royal Dutch could very well surprise to the upside and manage to complete its buyback or exceed it. I expect that over the medium term, the company and its share price will do very well. I'm more than happy to get in at a 6.6% dividend yield while there is a massive buyback program going on, especially with the odds of oil spiking due to geopolitical and other factors.

Disclosure: Long Royal Dutch Shell. 

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