The Royal Dutch Shell (LSE: RDSB) share price has underperformed the FTSE 100 over the past 12-months by around 13%, including dividends. The way I see it, there are a handful of reasons why the stock has underperformed the market in 2019.
The oil price
For a start, the oil price, which rallied to a high of more than $65 a barrel at the end of April, has struggled to push above this level.
The price of black gold has remained depressed since hitting this high and has traded in a range of between $50/bbl and $60/bbl for much of 2019.
This oil price volatility has hit Shell’s earnings. Its second-quarter net income fell 25%, and then the company posted a 15% decline in current costs of supply earnings for the third quarter.
The decline in earnings was a sharp turnaround from the fourth quarter of 2018 when the group reported a 36% jump in profits, taking the full-year result to the highest level in four years.
As well as falling profit, I think investors have also been deserting the company after management warned that the group might have to delay its cash return policy.
Following Shell’s takeover of BG Group, the company had been promising to return $25bn to investors with buybacks to offset the dilution of the merger over the next few years. The group started this programme in July 2018 but announced that it might scale back this initiative in November.
“The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 timeframe,” CEO Ben van Beurden told investors and analysts at the beginning of November. He later sought to downplay the warning, but the damage had already been done.
The third and final reason why I think investors have been selling the Shell share price are the concerns about the firm’s role in climate change.
On this front, the company is trying to change. It is investing billions over the next few years to bolster its renewables business and recently failed to acquire Dutch renewable energy firm Eneco for €4.1bn. In my opinion, this failed deal showcases Shell’s renewable energy ambitions.
Time to buy
Considering all of the above, I think it would be smart to buy the Shell share price in 2020.
After recent declines, shares in the company have fallen to a forward P/E of 10.5 and support a dividend yield of 6.6%, a level of income that looks extremely attractive in the current interest rate environment.
On top of this, Shell has already shown us that it can cope with a low oil price. Meanwhile, a delay to the buyback isn’t too much of a concern for long-term holders.
On the climate change front, Shell is changing, and the company is spending more than most of its peers to reduce its carbon footprint.
So, that’s why I think you’d be smart to take advantage of the Shell share price’s recent decline and buy the stock in 2020.
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Rupert Hargreaves owns shares in Royal Dutch Shell. 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 2019