Recent Buy

buyThat didn’t take long. I received my once-a-month commission check from my day job this morning and quickly transferred some cash over to my brokerage account to get busy shopping! Of course, I already had my list made out and checked twice so it was easy pickings. There isn’t a ton of value in the market currently, but as I wrote about recently I decided to concentrate on the energy, financial and real estate sectors. After some introspective thinking and deep analysis I decided on a global energy company for the most recent addition to my portfolio.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 25 shares of Royal Dutch Shell plc (RDS.B) on 7/3/13 for $65.82 per share.

Royal Dutch Shell plc doesn’t get a lot of press here in the U.S., but it’s important to remember that this company is the second biggest company in the world in terms of annual revenue. It’s revenue was over $481 billion last year. That’s pretty huge. Royal Dutch shell is a vertically integrated oil and gas company with substantial global upstream and downstream operations. They operate in over 70 countries, and have over 44,000 service stations.

Although this wasn’t my first oil supermajor pick, I finally decided on RDS.B for a number of reasons. First, the lackluster performance in the shares YTD. RDS.B is down a full 7% (before dividends) YTD as of today, while the S&P is up 13.26% YTD. That 20% spread is pretty attractive from a value perspective. I don’t know if shares are going to bounce back or not and to be honest I really don’t mind. If they stay suppressed at these levels I’ll be a very happy net buyer of further shares to build my ownership position in the company. I picked up shares at a level that’s only $0.80 higher than the 52-week low. The P/E ratio currently stands at a lowly 7.94.

The yield is pretty strong here. My purchase gives me an entry yield of a full 5.5%. That’s higher than a lot of utilities out there, and that’s backed by a company that isn’t bound by the type of anemic growth that utilities can sometimes come attached with. Based on the current dividend payout of $.90 per quarter, I’ve added $90.00 to my annual dividend income total.

What’s not to like, right? Well what I believe is keeping shares cheap here is Shell’s large exposure to natural gas and the price weakness natural gas has had over the last few years. Over a third of its profit comes from the liquefied natural gas operations and about half of their production was natural gas last year. They’re making some huge bets on natural gas right now and is actually increasing it’s attention in that direction and away from oil. They want to be the world leader in L.N.G. production and supply, and are making big strides toward this goal. It could hamper profits in the short-term, but could also lead to really strong growth in the future as energy use starts to move in this direction. Currently, margins are much lower than peers due, at least in part, to the large concentration on L.N.G.

Shell is one year into their current 4-year plan to deliver $175-$200 billion in total cash flow from operations, a net capital spending program of $120-130 billion, and a competitive dividend for shareholders. The CEO, Peter Voser, states the company is on track to meet all of these objectives. Shell is one of the biggest dividend payers on an absolute basis, so from an income investor’s standpoint this is an attractive company to invest in. Shell announced approximately $11 billion in dividends during the year of 2012.

Shell hasn’t been growing the dividend in spectacular fashion over the last five years. The dividend payment on the ADR shares remained at $0.84 per share quarterly from 2009-2011. The company raised it to $0.86 per share quarterly in 2012 and then again to $0.90 per share quarterly in 2013. I hope this is the beginning of a trend, as Mr. Voser seems quite keen on growing the payout to shareholders. From the best I can tell, the dividend remained static after the price of oil plummeted from 2008-2009 and then during the Great Recession. Although in absolute terms, RDS.B would have paid much more dividend income out than every other supermajor during the last five years. The great thing is that even with this high yield, the dividend is well covered with a 43% payout ratio by earnings and is also comfortably covered through FCF.

I valued the shares using my typical Dividend Discount Model, although I used lower dividend growth numbers than usual to factor for the higher yield and lower historical growth of the payout. I typically use a 7% growth rate which is fairly conservative, but this time I used a 5% rate. With a 10% discount rate I get a Fair Value on shares at $75.60. I think a case could be made that shares in Shell right now are attractively valued with a higher-than-average entry yield. The balance sheet is very clean and the growth projects are really humming as Shell continues to focus on L.N.G. I think the future looks fairly bright for Shell, and brighter than the recent past has been. Obviously the price of crude oil has a large impact on Shell’s revenue and profits, even factoring in the focus on L.N.G. Most of Shell’s predictions factor on a $80-$100 price point for a barrel of oil, so this is something to monitor.

I currently have 37 positions in my portfolio after this purchase, as this was a new investment.

Some current analyst opinions on my recent purchase:

*Morningstar rates RDS.B a 4/5 star valuation with a Fair Value estimate of $79.00.
*S&P Capital IQ does not currently track RDS.B.

I’ll update my Freedom Fund in early August to reflect my recent addition.

Full Disclosure: Long RDS.B

What are you buying?

Thanks for reading.

Edit: Added P/E ratio.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

 

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41 Comments

  1. I bought rds.a in early May. what is the difference between the A and B shares for us Americans? (being that this is not an american company)

  2. Nice pick-up on RDS-B!! I have too much CVX, otherwise I’d pick up some of royal dutch. Great personal site btw…I like your real-time posting of stock purchases. It supports that cliche of “pix or it didn’t happen” mentality. Keep up the postings!

  3. funny, i was actually looking at that and BBL. I ultimately went with BBL and picked up 100 shares at 51.20. Will be looking to buy RDS as my next purchase though! look forward to being a business partner with you on yet another venture 🙂

  4. Michael,

    Hey, great point there! That’s $7.50 per month that I can probably count on for many more years to come, with raises here and there to boot. That’s a free lunch or two for possibly the rest of my life. I’ll take it! 🙂

    Take care.

  5. Anonymous,

    The B shares are not “double taxed”. See the above comment. B shares are based out of the U.K., which is under a tax treaty.

    Take care!

  6. daebu,

    I think you made a fine purchase in the BBL shares. I picked mine up not long ago at around the $55 mark, so obviously I think they’re attractive here (even factoring in a slowdown in China).

    Glad you enjoy the blog and like the posts. Please stick around! 🙂

    Best wishes.

  7. Took2Summit,

    Great buy on BBL. Like I said above, I think it’s attractively valued here.

    I look forward to being a part-owner with you as well. May our business ventures prosper!! 🙂

    Keep up the great work.

    Best regards.

  8. The Dividend Guy,

    You’re correct. There is no foreign tax withholding on the B shares. They are only taxed by the U.S. government.

    Thanks for stopping by!

    Take care.

  9. DM, I also like Shell at these price levels, it is one of my largest positions, and I have been adding. You got a good entry price. BBL and CAT are the other 2 positions I have been adding to over the past few months.

    Keep up the good work.

    cheers,
    AA

  10. Hey DM,

    I knew you were looking at RDS.B and was wondering if you’d pull the trigger. I think you’ll be glad that you did in 10 years. I think their gas investments will eventually start to pay off. If RDS.B stays this depressed it will likely become my largest holding as I will keep adding more at least prices.

    Take care!

  11. Great site here, came to it via the conservative income investor. Two great sites that have become invaluable to me in my learning process. Just curious if you have a max number of secuities to own or will he just buy companies that you want, regardless if already owned or not?
    I am just starting my journey and this creates some debate when asked, some say hundred plus while others say 20 is a good number.
    Thanks again,
    Josh

  12. DM
    Royal Dutch Shell made it onto my buying list two days ago – now I see that you have just pulled the trigger. Reason enough for emulating you right away… 😉
    Take care!

  13. Nice buy! If I hadn’t just added some CVX and XOM, RDS would be up there. The higher yield is nice and like AAI mentioned above their nat. gas investments will start to pay off. I think it’s just a matter of time until more of our daily energy needs are met by nat gas which just means higher prices, which means higher revenue, which means higher profit, which means higher dividends. What a great combination!

  14. AA,

    Hey, thanks for stopping by.

    You’ve got some cheap names there. All have pretty low P/E ratios with yields that are sitting pretty attractive based on their historical numbers. Great stuff!

    Keep up the great work on your end too. I’m just trying to catch up! 🙂

    Best wishes.

  15. AAI,

    I looked at it for about a month. I went back and forth on it, but I couldn’t get over how cheap it was and how attractive the yield is compared to other oil supermajors. The only other one that is in the field in terms of valuation and yield is BP, and RDS.B isn’t a whole lot more expensive and doesn’t have the ongoing litigation headaches. I was leaning towards XOM, but I’ll still end up owning XOM at some point in the near future anyway.

    I agree with you on natural gas. These guys that are running these projects and looking at the numbers are a lot smarter than me. But I can’t imagine how the the world over the next 10-20 years doesn’t use more and more natural gas, which Shell is poised to be a leader in. We’ll see how it goes, but I’m willing to make a bet with a company that pumps out well over $400 billion in annual revenue.

    Best regards!

  16. Captain,

    Thanks for adding that. I can’t believe I forgot to include that lowly P/E in the article. I edited the post and added an addendum for that. Thanks for mentioning it. Even for an oil supermajor (which usually has a low P/E), this is very low here at under 8. XOM and CVX are both over 9. The P/B and P/S are even more impressive with RDS.B compared to the others.

    Glad you like what you see! 🙂

    Take care.

  17. Josh,

    Glad you found the blog! Tim runs a fantastic site over there, so you’re getting some great exposure from him. He’s a very smart young man.

    As far as maximum number of securities, I don’t think I want to own more than 50. It starts to get a little unruly past that, especially if you have a full-time job and other hobbies to absorb your time. I think 45-50 will probably be where I feel most comfortable. I look at my situation now and I own 37 ownership positions in different companies and I don’t even own a slice of many other high quality companies. There’s still at least 20 on my watch list that I really like, so it’s going to be tough as I eclipse 40.

    Thanks for stopping by. Great question.

    Best wishes!

  18. TiglatPileser,

    Well, if it made your buying list I’m sure you seen something you like. It’s hard not to like a global juggernaut like Shell, especially with that low price and high yield. The only thing I don’t like is the lackluster dividend growth history. But, even if it’s a bit spottier than my other 36 holdings the yield is among the highest of everything I own so I can probably live with that. A 10% raise from here would mean a yield over 6%, which is insane from a company with such great dividend coverage and growth prospects.

    Best regards.

  19. Pursuit,

    The high yield is definitely attractive here. And one doesn’t need to “chase yield” with this name as the dividend is very well covered.

    I agree with you and AAI on natural gas use. I can’t see a future where the world doesn’t ramp up use of it, especially as more comes online and oil becomes harder and harder to extract. The nice thing is that Shell is right about 50/50 on oil and natural gas so if you’re looking to hedge your bets this is about as good as it gets.

    Take care!

  20. RDS.B is definitely a solid buy and is a nice way of diversifying in the energy sector. I’m not particularly motivated to own RDS.B right now since I have CVX, COP, XOM, and KMP is my portfolio. If I hadn’t bought XOM way back when it was cheap then I probably would have bought RDS.B. But RDS.B does look rather sweet right now, so I may get tempted to buy it anyway.

  21. Spoonman,

    I like to be pretty heavily diversified in the energy sector due to the inherent risks. I now own CVX, COP, PSX, KMI, OKE and RDS.B in this sector. I’ll very likely pick up XOM and then be done from there. I think they’re all high quality companies that offer something a little different.

    I think RDS.B looks attractive here. Not too many companies out there offering that kind of yield and growth combination.

    Best regards!

  22. It is a nice buy and a great yield. I am already exposed to REITs but want to increase my exposure in utilities and energy. I think these sectors are quite conservative and bringing nice yields. I agree with you that there is very little value out there, but I think we are getting to it as the market continues falling. I hope it will, so i can be buying more.

  23. thanks for that great pick. Was on my list months ago and never pulled the trigger. Your analisis pleases me a lot, and makes your blog more valuable. Good to you !

  24. I am not the original poster of this question 🙂
    So when you say tax treaty, does that mean there wont be additional withholding to begin with? or will they tax twice and then we fill some form at tax filing time to claim those dollars back ? Seems like a hassle in my book if it is the latter.

  25. Solid purchase. The oil majors in general are fairly attractive at current prices. My preference would be for either CVX (which I already own) or XOM (which I don’t), but I also see value in RDS.B and BP.

  26. Martin,

    I’m with you. Not much value out there. It’s tough to find anything really “compelling”. I don’t know if RDS.B is compelling, but I’d say it’s a solid buy at today’s prices. If the growth projects work out as projected, oil stays between $80-$100/barrel and natural gas demand picks up slightly there could be quite a bit of upside here. We’ll see how it turns out!

    Best wishes.

  27. DGM,

    I agree with you. The oil majors represent some decent value in today’s market. Nothing is a steal, but I think RDS.B is cheaper than all of them except for BP. And BP has considerable risk still.

    I’m with you on the preference. I would say long-term I’d rather have larger stakes in CVX and XOM, and XOM was actually what I was going to purchase. I just couldn’t ignore how much cheaper RDS.B was, along with the considerably higher yield.

    Take care!

  28. Anonymous,

    The B shares are based out of the U.K. and we have a tax treaty with the U.K. This means that the B shares will not have a foreign tax attached to them. You’ll only pay the U.S. government tax if you do not have them in a tax sheltered account like an IRA.

    Hope that helps!

    Best regards.

  29. Co-owner since Friday ! and not with a small amount due to an error of quoted Price in €uros. Gee ! 200 shs. I really hope they go up someday.

  30. Aspenhawk,

    Very nice buy! Each ADS share counts for 2 regular shares, so that would be 50 ordinary shares. You now own 4 times as much of the company as I do, so that’s very nice. That’s a sizable investment. I hope it works to our advantage! You’re going to receive some pretty nice income from Shell now.

    Best regards.

  31. Hi Dividend Mantra,

    Great buy, RDS.B is my 2nd largest position next to PM. I’m enrolled in the dividend script programme. Love to see getting one new share each quarter. With the low valuation i’m making the dividend work hard here. RDS.B is the only company where i prefer stock dividend in stead of cash. When it gets overvalued i will definitley switch to cashdividend.

    Did you also take a look at unilever (UN)? It’s also an anglo/dutch company and a dividend contender. There most recognizable brands are for example; axe, dove, lipton and ben &jerry´s. There main competitor is PG. They are reasonably valued at current prices.

    Also how do you feel about vodafone? There aim is to maintain the dividend at current levels. Do you still want to hold it in your portfolio if they don’t grow the dividend?

    Best regards

  32. Trader666,

    That’s not a bad idea at all – taking the dividend in shares, instead of cash. Although I take the dividends in cash, it all gets reinvested back into shares anyway. I’m sure I’ll be buying some more RDS.B in the future! 🙂

    I like Unilever plc quite a bit. I think the brands are fantastic. I see that Axe recently released razors to compete with Gillette (PG). I track the UL shares, based out of London. That is on my watch list for sure. Last I looked, the P/E ratio was around 20, which is around the same as many other consumer companies like KO, PG and the like. If it comes down slightly I’d definitely be interested in adding the company to my portfolio.

    As far as Vodafone goes, I’m not sure yet. I’m watching this holding a bit closer than most others. The FCF has been falling over the last few years, mostly due to the weak operations in Europe and that has hurt it’s ability to keep raising the dividend by 7% as management has wanted to do. They now aim to at least keep the dividend static, and it’s really a prudent move on management’s part so I can’t fault them for that. We’ll see how it goes. I wouldn’t mind a static dividend for a year or two because the yield is so high. We have to keep in mind that this is somewhat common with telecoms. Although At&T (T) raises the dividend every year, it’s by a token amount. Many European competitors to Vodafone had to cut the dividend over the last couple years, so I think the way the dividend has actually been growing through the European crisis is a good thing. We’ll see how it goes.

    Great questions!

    Best wishes!

  33. If anyone knows if I should pay dividend witholding tax on UK stocks if I buy it into my RRSP (Canada)?

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