UK Edition
Questor: hold Shell for insurance against shocks – from the oil price or the stock market
To return to Royal Dutch Shell once more could seem a little boring but there is method in the madness.
First, markets do not quite feel themselves. It may just be a case of the summertime blues, but a rout in emerging market currencies, rising credit “spreads” (the additional interest rate that a company must pay on its bonds relative to a government bond) and wobbly bank shares all create a sense of unease.
Add those to the manner in which bullish stock market sentiment is trying hard to ignore a strong dollar, sticky oil prices and tighter monetary policy in America, and you have a recipe for a bit of an upset, especially after a nine-year bull run.
Second, the oil price is proving remarkably resilient in the wake of both a strong dollar (which can often dampen demand for commodities, since they are generally priced in greenbacks) and Opec’s decision at its recent summit to let Saudi Arabia increase its output of crude.
It may be that Riyadh’s efforts will simply cover for lower production in Libya and Venezuela, while America is now doing its best to freeze Iran out of the market again.
Shareholders in Shell are at least beneficiaries of both a firm oil price and a dynamic dollar. Since this column’s last look at the oil giant, following its pleasing fourth-quarter results in early February, the shares have risen by nearly 10pc.
Yet they have actually become cheaper. The price-to-earnings ratio has dropped from 15 to 13 and the yield has stayed roughly the same at 5.4pc.
This is because, thanks to the dollar and oil price, earnings forecasts have risen faster than the share price, while the galloping greenback has increased the value of the $1.88-a-share annual dividend when translated back into a weaker pound.
Oil and the dollar could still reverse course and investing purely on the basis of White House trade policy is hardly a great idea either, as there could be a change in strategy at any time.
But if president Trump persists with sanctions on Iran – and the threat of action against big buyers of Tehran’s oil, such as India – there remains the (small) chance of an oil price shock.
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The firm’s cost cuts and efficiency programmes are boosting cash flow even before the benefits of any increase in oil prices. Remember that in 2017 free cash flow (defined as operating profit plus depreciation and amortisation minus net working capital minus capital investment minus tax) more than covered the cash cost of the dividend – and that was when Shell got an average price for its oil of $49, not the $75 or so on offer today.
Shell would at least provide some insurance against an oil price shock, while its yield would provide some comfort in the event that stock markets finally succumb to any sort of wobble.
Questor says: hold
Ticker: RDSB
Share price at close: £26.73
Update: ITV
Shares in terrestrial broadcaster ITV stumbled last week when the firm announced that Ian Griffiths, its finance director and chief operating officer, would be stepping down at some point over the next 12 months.
The departure of a finance director can often be a warning sign: if anyone knows where the skeletons are, and whether they are about to fall out of a cupboard, it is the head bean-counter.
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But on this occasion the share price stumble is more of a tribute to Mr Griffiths’s decade in the job than a sign of fears over ITV’s financial well-being, as he played a key role, alongside Adam Crozier, the former chief executive, in cutting debt and boosting profits, which in turn paved the way for a resumption of dividends, and then the payment of special dividends as cash flow blossomed.
Mr Griffiths may well therefore be missed but at least the new chief executive, Dame Carolyn McCall, can select her own candidate to help with the implementation of her “strategic refresh”.
The shares look cheap on 12 times earnings with a 4pc yield and the Sky bid situation could still flush out a buyer for ITV.
Questor says: hold
Ticker: ITV
Share price at close: 171p
Russ Mould is investment director at AJ Bell, the stockbroker