UK Markets closed

Are Royal Dutch Shell shares now too cheap to ignore?

Paul Summers
·3-min read
Arrow descending on a graph portraying stock market crash
Arrow descending on a graph portraying stock market crash

Royal Dutch Shell (LSE: RDSB) shares were on the front foot this morning as the FTSE 100 oil major provided the market with an update on trading over the third quarter of its financial year.

With its valuation now at its lowest level for over 25 years, is this fallen giant too cheap to ignore? I think it depends greatly on how patient prospective investors are prepared to be.

Shell shares beat expectations

Like it’s similarly-battered FTSE 100 peer BP, Shell shares have been deeply affected by the plunging oil price in 2020. Billions of dollars of assets have needed to be written off by the company.

Today however, Shell surprised on the upside. Adjusted earnings came in at $955m for Q3. While nowhere near the $4.77bn achieved over the same period in 2019, this is still better than the $638m in Q2. It’s also above what the market was expecting.

Shell shares’ tough outlook

As encouraging as today’s news is, it seems fair to say that Shell still faces an upward struggle. Indeed, things could actually get even worse before they get better.

The ongoing pandemic is clearly the biggest near-term issue Shell shares face. The recent rise in infections around the world (particularly in Europe) has forced governments to re-introduce lockdowns. Although these new restrictions aren’t expected to last as long this time, they will still have an impact on Shell’s business. Put simply, fewer vehicles on the road leads to lower fuel sales and lower demand for oil. This means lower profits at Shell.

Second, there’s the push away from fossil fuels and towards greener forms of energy. For its part, Shell is planning to focus on commercialising hydrogen and biofuels as well as energy for electric vehicles. It aims to be a “net-zero emissions energy business by 2050 or sooner.

Nevertheless, turning this £70bn tanker around will cost a lot of money and Shell will need to be ruthless. In September, it announced that up to 9,000 jobs would be cut to make $2bn of savings. I wouldn’t bet against more being let go in the future.

Dividend cut

Up until recently, Shell shares presented as a solid pick for income seekers. Not cutting your dividend since the Second World War has a habit of doing that.

Since the arrival of Covid-19 however, Shell has been forced to reassess its priorities. Quarterly payouts have been severely chopped. Today’s $0.17 per share compares unfavourably with the $0.47 per share awarded this time last year even if it does represent a 4% increase on that returned for Q2.

Having approved a new ‘cash allocation framework’, Shell now intends to distribute 20-30% of its cash flow from operations to shareholders once it’s brought its debt down to $65bn from $73.5bn. So, dividends could keep rising from here but I don’t think anyone should underestimate the challenges ahead.

Bottom line

With a tough outlook, Shell shares don’t feel like a compelling buy at the current time. Notwithstanding the fact that (like all stocks) it could rally like the clappers in the event of a vaccine breakthrough, I’d be inclined to look elsewhere in the FTSE 100 for my income fix. Those looking purely for big capital gains could be in for a long wait.

Royal Dutch Shell shares look cheap and yield almost 7%, but today’s gains may prove temporary.

The post Are Royal Dutch Shell shares now too cheap to ignore? appeared first on The Motley Fool UK.

More reading

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020