It is, by some margin, the most valuable company on the UK stock market. Last year Royal Dutch Shell paid out £11.9 billion in dividends, just £1 billion shy of the market value of the owner of British Airways. Its revenues were comfortably higher than the economic output of Afghanistan
Shell has a plan to buy back an extraordinary $25 billion of its own shares to help maintain its stock market worth and to return capital to investors.
You can be sure of Shell. Or can you? Looked at another way, this FTSE 100 company’s profits are inextricably tied to the oil price and the health of the global economy, it is scrambling to develop renewable energy sources as the world increasingly turns away from its polluting core products, and, to the likely chagrin of investors, there are question marks over the timing of its stock repurchase programme.
Royal Dutch Shell traces its roots to 1833 and an antiques shop in London that moved into the import-export business. The group was created in 1907 through the merger of Royal Dutch Petroleum of the Netherlands and Shell Transport and Trading of the UK.
Vying with global rivals from BP and Texaco to Chevron, Royal Dutch Shell explores for, produces, markets and sells oil and gas. It also trades them, as well as electricity and carbon-emission rights.
The group, which is headquartered in the Hague, employs about 82,000 staff spread across more than 70 countries and in its latest financial year made a profit of $23.9 billion on revenues of $388.4 billion.
The capital flows at work in Shell’s business are eye-wateringly high. In the first nine months of this year, its operating activities — including selling its oil and gas — generated cashflow of just under $32 billion. Then again, because producing the commodities is a costly business, its operating expenses came in at $27.5 billion. There’s not a great deal of room for manoeuvre. Just because the numbers are high doesn’t mean they are unassailable. A return on average capital employed in the third quarter of 8.6 per cent is respectable but not especially high.
Shell has made its financial projections for as far ahead as 2025 based on an oil price of $60 a barrel. Brent crude was trading at about $65.64 a barrel yesterday but has regularly been below that over the past five years, including a low of $27.88 at the beginning of 2016. A declining oil price has the power to seriously hit the group’s profits, as does a downturn in global growth that the group said at the end of October jeopardised its aims of completing its $25 billion buyback by the end of next year.
The group has spent $1.6 billion working on initiatives involving alternative fuels and power since 2016, and has also made several acquisitions in the sector.
There is a real question about whether the group can make its move into renewable energy as profitable, and indeed as substantial, as its traditional activities. Although, like BP, Royal Dutch Shell appears to have embraced alternative energy sources, at the moment its activities remain at the fringes relative to its status as a leading player in Big Oil.
For those comfortable with that, the returns the group is promising to make to shareholders are extremely high: about $125 billion between 2021 and 2025 based on its cashflow projections, to be returned through a combination of dividends and buybacks.
On environmental grounds, some readers may be uncomfortable buying Shell shares, as this columnist is. But they are pretty compellingly valued, trading at just over 11 times forecast earnings for a dividend yield of 6.5 per cent. In every other way they are an obvious buy. ADVICE Buy
WHY Ability to generate very large cashflow and commitment to return value to shareholders
Halfords
The newish rider in the saddle at Halfords has steered the retailer into yet another strategic repair job but so far seems to have done little to banish the profit warnings.
In fairness to Graham Stapleton, 50, who joined the group from Dixons Carphone at the beginning of last year, his approach seems to have been an eminently sensible one.
Faced with the rise of Amazon, Mr Stapleton has prioritised offering customers things that they can’t get online — services such as fitting brake pads and windscreen wipers and carrying out repairs. Unfortunately, his overhaul has coincided with the biggest crisis in retailing in living memory, compounded by the kind of unseasonably mild weather that hits sales of de-icer and antifreeze.
Halfords was founded as a hardware shop in Birmingham in 1892 and listed on the stock market in 2004. It sells bikes and accessories, as well as general products for cars, from tyres and batteries to brake fluid. It has 448 shops, 317 garages, branded as Autocentres, 26 performance cycling stores and 68 vans that visit customers’ homes to fit new parts. Based on the idea of building up the services side of Halfords, Mr Stapleton plans to expand the number of Autocentres to 550 and have 200 vans over the medium term. He wants to double the proportion of service-related sales from the current 24 per cent.
He may well be on to a winner, but against the backdrop of falling revenues and profits and the need to invest, Mr Stapleton asked shareholders last month to stomach a 33 per cent cut in the final dividend to 8p a share. He also reset the annual payout to 12p as from next year, a third lower than the full-year dividend last year.
The shares, down 1¼p, or 0.7 per cent, to just under 176p, have fallen by a shade over 50 per cent since Mr Stapleton took over, which doesn’t necessarily make him wrong but does show that investors are unhappy.
The shares are valued at just 8.2 times Investec’s forecast earnings with a dividend yield of 8.1 per cent. That may make it tempting for some investors as a recovery play but for this observer the risks are too high.
ADVICE Avoid
WHY Unappealing bet hinges on recovery in retail sector
