Though income and growth stocks are often seen – with very good reason – as separate entities, when we’re looking to invest, it’s nice to have both characteristics. Dividends play a major role in the attractiveness of an income stock and thus the ability to grow its share price.
It was only natural then, that when I saw news recently that Royal Dutch Shell (LSE: RDSB) will be “slowing investor payouts” after its earnings dropped 50%, I was worried the fallout could be bad for the stock. Looking closer however, I am not so sure it will be a long-term problem, at least if it can get its earnings figures back on track.
The numbers
A 50% drop in profits is bad news for any share, and there’s no getting around that somewhat obvious fact. The underlying problem that caused it, however, is far more fundamental to a company’s future than the simple fact of the fall. In the case of the latest numbers from Shell, the list of reasons all really boil down to one thing – lower oil and gas prices.
Shell cited “challenging economic conditions”, as well as weak refinery margins, and oil and gas prices as causing the drop, but in essence these are all the same thing. Challenging economic conditions means less demand for oil, and lower oil prices. Lower prices also usually mean the margins for refined products are narrower.
The 50% headline figure was for Shell’s fourth-quarter earnings – its full-year numbers show earnings (actually net income adjusted for cost of supply, Shell’s preferred profitability measurement) falling 23% for 2019.
Buybacks and dividends
So what’s Shell doing now that might affect investor returns? Following the results, it made what I actually believe to be the sensible decision to slow the pace of its planned $25bn buyback programme. This was a contingency it had always said was a possibility.
It’s also worth noting that this is a slowing of the buyback, not a halt. Indeed, Shell has already completed $15bn of share repurchases, and now plans to buy back $1bn of shares between January and the end of April, as opposed to a planned $2.8bn.
And we should not ignore the fact that though the lower earnings certainly put Shell’s dividend at more risk, as yet there have been no plans to reduce the payout. Shell has one of longest and most consistent dividend schemes of any UK company, which offers me some comfort that reductions will only come if absolutely necessary.
I think this slowing of the buybacks may hurt the price a little, but as my colleague Paul Summers rightly pointed out, nobody is buying Shell stock to make large capital gains. Instead it is an income stock, and a safety investment.
So looking at Shell as an income stock, I think this latest news has potential to offer a dip-buying opportunity. Shell’s price has been pretty strong for the past year or so, and if it does see a short-term decline, it might be a perfect chance to buy some shares.
I will be keeping an eye on the oil price as a guide — Shell needs Brent crude at about $66/bbl this year and if this happens, I think it means Shell stock could be oversold.
