Royal Dutch Shell Actually Might Be a Good Play in 2020
Royal Dutch Shell is being touted by Barron’s as one of their top 10 stock picks for 2020. They think its growth prospects are noteworthy, but it might be good for another reason.
There are plenty of stocks that haven’t done very well over the last 10 years, and have tanked while the average stock has more than tripled. In comparison to some, Royal Dutch Shell has done relatively well over this time, as while it hasn’t gone up at all over this decade long run, it hasn’t gone down either, and is stuck in the same piece of mud as it was in 2009.
Similarly, plenty of stocks have gone down in 2019, while stocks in general have gained almost 30% on average so far, so being even for the year isn’t as bad as some. Still though, stocks that don’t grow at all should not be on the tip of our tongues when we look to decide which ones will grow going forward, unless we have some very convincing reasons to think this.
In terms of price performance, Royal Dutch Shell has been a pure dud. If the goal was to just run in place, this stock would be a superstar. An absolute lack of growth does not portend growth though, and the first thing that should stand out when we read that Barron’s thinks that this stock will perform so well that it deserves to be in the top 10 reads like a beat up car being put in the top 10 performance cars in the market.
We might look at its performance during the last decade and think that maybe it’s time is coming, and that this data is on the older side and perhaps if we look at more recent history, we will see a trend develop. When the market going up almost 30% and the price of oil rising by over 20% doesn’t start your heart beating even a little, it sure sounds like we should be giving up on it.
We then need to ask ourselves why anyone would even consider putting Royal Dutch Shell in the top 10, or the top 10% or even the top 50%, where being in the bottom 50% should turn our heads away with conviction. Investing in a stock with that poor of an outlook would normally actually be simply crazy. Royal Dutch Shell has been far worse than most of the stocks in this lower half for that matter, and if these things haven’t woken it up, it is in a coma that would take who knows what to bring it out of.
One of the first things we usually see when someone is trying to promote a dud is how much of a discount they are to similar stocks, in this case, other major oil stocks. This is the worst sector out there and if you lag your peers in a sector that lags its peers significantly, that’s not something to be happy or excited about. The only thing pointing this out should do for us is to have us cringe an extra amount.
This is actually pretty useful information if used the right way, which is to do what the market is doing with these unloved stocks and discount them. We could turn this idea on its head and have a surprisingly good strategy just with this. The fact that a stock has performed terribly and especially relative to its earnings is never a good thing and always a bad thing, at least while it is going on. If you are on a losing streak, this suggests more losing than winning until you can at least turn the corner, but until you do, people are going to be more skeptical and not without good reason.
We also need to consider the other thoughts and reasons people have about a stock that they are hoping will exit the doghouse soon, and even though a low valuation is two strikes against a stock, if they are now swinging the bat well or are reasonably expected to, this does have the potential to change the game up at least.
This Company is Going All in to Support the Stock Now
It turns out that Royal Dutch Shell is on a serious campaign to buy back a lot of shares, a campaign that has just started and is planned to continue over the next few years. They are also committed to increasing dividends over this time, which normally is a bad thing, but for an oil company, it actually can be good.
Oil stocks are generally garbage, high dividend stocks are generally garbage, but sometimes you can combine garbage with garbage and get something that is at least worth a serious look.
In spite of Bernstein analyst Oswald Clint seeing a 50% upside with this stock, this commitment is not even remotely significant enough to produce anything close to that, and just seeing this stock grow beyond even a modest amount will be notable.
However, this plan does something else for the stock, and something that makes it considerably more attractive to dividend players. The world of pursuing dividends and actually making sense of doing so is quite a challenge normally, as their returns are paltry compared to what growth stocks deliver, and you have to take on most of their risk to shoot for these terrible returns.
Oil companies these days stand out from companies in other sectors in that we actually become relieved that they aren’t spending that much money on trying to expand their businesses, after we’ve gotten to a point where the returns have become so marginal that this often just ends up diluting the value of the company too much.
With this being the case, getting your returns from dividends instead of from growth makes a lot of sense, and especially with a stock that simply is not allowed to grow much anyway. The high dividends that Royal Dutch Shell pays out probably hasn’t limited their growth all that much, but it sure does put money in the pockets of their shareholders, and this can work out to be a nice deal for the type of investor that is attracted by dividends.
This provides us an opportunity to actually take good advantage of companies that trade at steep discounts to their earnings, as if the earnings are still good, we get a full measure with dividends. Price to earnings ratios may actually have a sensible use apart from scaring us off if we’re out for growth.
This strategy serves to counter the biggest issue with oil stocks, which is their dismal long-term outlook. The market will therefore seriously discount any good news because it won’t last, so you don’t really collect on these business improvements very much if at all anyway, but they can’t discount the cold hard cash that you get with a dividend. Low price to earnings ratios does not mean that this will work out, but it at least indicates a potential which may be worthy of further examination under the right conditions.
We might still want to say that even with their very generous dividends, the stock still underperforms, and 6.75% a year wilts in comparison with what good stocks deliver, or even the average stock for that matter. Investors who don’t have much time left though and want to be extra confident that their returns for any given year will be positive can find a dividend play like this quite appealing though.
In 10 years, this strategy will likely be kicked to the curb once again, just like it has been in the previous 10 years, but in any given year, the risk of a loss is higher than with over a longer period and if you just have a few years left you could be tempted by something like this with the right conditions.
This Could Be the Perfect Dividend Seeking Storm
The right conditions don’t come around that often but Royal Dutch Shell may be in this zone now. There are two things that we need here, a very high dividend and a very good amount of stability.
It is not that oil stocks are stable by nature and you can see yourself dropping a bundle on them when the oil market turns sour, and normally this would be enough to scare us away from this stock. However, Royal Dutch Shell’s massive commitment of $125 billion in stock buybacks and dividend payments over the next 5 years seems just what the doctor ordered.
We’re not even looking for them to grow their share price with this, although it will to some degree, although it’s not likely that we’re talking anywhere near what Bernstein imagines. We cannot forget that the market will continue to discount all this due to how dimmer the future is for them, but this bit commitment will serve to at least beat back this disdain by the market by diluting it as well as better stabilize the normal ups and downs of the oil business.
We now have the second major piece to go along with a dividend this high, which is their looking to stabilize things. If the stock does not move an inch in net terms, but you walk away with 6.75%, that can be seen as a sweet deal indeed to older investors who are willing to give up potential for long-term growth for more reliable returns in the shorter term.
As bad as dividend funds end up being, this doesn’t mean that all dividend stocks are bad and some can certainly have their place and time. For Royal Dutch Shell, right here and right now might be the place and time for them to not shine on the charts but much more quietly dish out a very good helping of reliability for those who have a bigger appetite for this.
Royal Dutch Shell perhaps don’t deserve to be in anyone’s top 10 for 2020 overall, but they certainly might deserve to be among the very best dividend stocks of 2020 if that’s your thing.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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