3 Things to Loathe About Royal Dutch Shell

LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about Royal Dutch Shell  (LSE: RDSB  ) (NYSE: RDS-B  ) .

I'll also be asking whether these negative factors make this FTSE 100 Anglo-Dutch oil giant a poor investment today.

As easy as A, B see?
Royal Dutch Shell has two classes of share listed on the London stock exchange. One has the ticker "RDSB", and you'll find this ticker quoted in articles here on the Motley Fool. The other class of share has the ticker "RDSA".

The shares carry identical economic rights, but their cash dividends come with different tax implications. The A shares have a Dutch source for tax purposes and are subject to Dutch dividend withholding tax (15%), whereas the B shares have a UK source for tax purposes and are not subject to any withholding tax. Also, cash dividends on the A shares are paid, by default, in euros; cash dividends on the B shares are paid, by default, in pounds sterling.

I've heard of many novice investors over the years -- and some more experienced ones! -- who inadvertently bought the A shares when they'd intended to buy the B shares.

No high-performance fuel
Shell hasn't managed to pump shareholder returns with high-performance fuel. The shares have delivered a positive annualised total return over five years (5.4%) and 10 years (7.3%), but failed to outperform the broader market; the FTSE 100 having returned figures of 6% and 9.4% over the same periods.

In other words, investors in Shell have been exposed to company-specific risk, while getting only a sub-par return compared with a less risky index tracker. Will Shell's shares continue their long-term underperformance of the broader market?

Fine is not fine
Anti-trust officials of the European Commission raided the offices of a number of oil companies, including Shell, last week. They're investigating allegations of price-fixing.

Anti-competitive agreements -- whether formal or informal, written or verbal -- are prohibited under the UK Competition Act and the EC Treaty. Companies can be fined up to 10% of their global turnover for each year they engage in the behaviour, up to a maximum of three years.

Shell's turnover for the past three years totals over a trillion dollars and the 10% figure is $130 billion. That represents around three times the company's latest annual profit and 18 years of dividends!

A poor investment?
You know the difference between the A shares and B shares, so there's no problem there. As for the price-fixing investigation, there are only allegations at this stage. Even if Shell has been guilty, I can't recall a past anti-competitive probe that has resulted in a maximum fine for a company. There are huge discounts given for co-operating with the investigation and for "early resolution".

The long-term underperformance of Shell's shares against the broader market is -- on the face of it -- more of a concern. However, in part this is due to a "de-rating" of the shares. At a current price of 2,312 pence you are paying just 8.5 times this year's forecast earnings, close to half the average of the FTSE 100. A "reversion to the mean" would likely see Shell's shares outperforming the market in future.

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Related Tickers

9/27/2016 12:01 PM
RDSB $1888.66 Up +6.16 +0.33%
Royal Dutch Shell… CAPS Rating: No stars
RDS-B $50.08 Down -0.37 -0.73%
Royal Dutch Shell… CAPS Rating: ****