Why Dividend Growth Investors Should Avoid Royal Dutch Shell and Total

Investors turn to big oil companies for steady and consistent earnings and dividend growth. Royal Dutch Shell and Total are oil majors with yields far above the industry average, but those high yields come at a very high price.

Apr 18, 2014 at 12:00PM

Editor's note: A previous version of this article used the RDS-B ticker instead of RDS-A while discussing foreign withholding tax. The Fool regrets the error.

Big oil companies are often viewed as perpetual annuities, with consistently growing dividends. Indeed, the best oil majors meet this criteria by offering dividend security and growth dependability. This article is designed to warn investors about two specific European oil majors with very high yields that some might find enticing. Upon further examination, however, these two companies are far inferior to American alternatives -- both in terms of earnings and dividend growth. 

Unreliable dividend growth
Total SA (NYSE:TOT) and Royal Dutch Shell (NYSE:RDS-A) are European oil giants whose 5.1% and 4.7% yields are far above the industry average and may seem appealing at first glance. 

Company Yield 20 year dividend growth (CAGR) 5 year dividend growth (CAGR)
TOT 5.10% 6.11% 0.06%
RDS.A 4.70% 10.57% 1.39%
XOM 2.70% 5.99% 8.18%
CVX 3.50% 7.26% 7.95%
IND AVG 3.50%    

Data from Fastgraphs

Dividend growth investors might be fooled by the 20-year growth rate. The five-year rate shows that these European oil giants are far less dependable when it comes to dividend growth. Indeed, Royal Dutch Shell did not grow its dividend at all from 2010-2011, while Total actually cut its dividend by 6% and 3% respectively for those two years. 

Another thing for income investors to consider is that these foreign companies have tax withholdings of 25% for Total and 15% for Royal Dutch Shell. This brings the effective yield for Total to 3.83% and Royal Dutch Shell to 4% (although most investors will be able to offset the impact of these withholdings with foreign tax credits). 

Some investors might be thinking, "the yield is still higher than ExxonMobil and Chevron, doesn't that compensate for the lower dividend growth?" The answer to this is "no" because slower dividend growth isn't these European oil companies' only problem.

Lower efficiency and profitability

Company 3 yr avg revenue growth 3 year avg EPS growth ROA ROE Operating Margin Net Margin
TOT 6.90% -7.20% 4.90% 11.6% 10.50% 4.90%
RDS.A 6.70% -6.70% 4.60% 8.9% 7.70% 3.60%
XOM 4.60% 2.30% 9.60% 19.20% 13.20% 7.40%
CVX 3.80% 4.00% 8.8% 15% 15.70% 9.40%
IND AVG 9.40% 4.80% 6.70% 6.70% 14% 6.10%

Data from Morningstar

As seen above, Total and Royal Dutch Shell have struggled recently with declining earnings as well as lower operating efficiencies and profitability.

Now, some would argue that Total's lower earnings are due to its massive investment designed to increase production by 13.5% by 2015 and 31% by 2017. 

Total is attempting to grow aggressively through projects such as the Yamal LNG (liquefied natural gas) export terminal in Siberia with 16.5 mtpa (million metric tons/year) export capacity. The first exports are scheduled for 2017. This project's capacity is comparable to the Sabine Pass LNG export terminal being built on the Gulf Coast by Cheniere Energy Partners (14 mtpa with expansion potential to 21 mtpa). 

A second LNG export terminal is under consideration in Papua New Guinea. This project (called Elk-Antelope) is designed to export LNG to Asia. It is situated atop a natural gas formation estimated to hold over five trillion cubic feet of natural gas.

The Fort Hills oil sands project in Alberta is scheduled to come online in 2017 and is expected to produce 180,000 bpd (barrels per day). The company is also investing aggressively in deepwater offshore drilling with projects off the coasts of Brazil and Africa. 

In addition to its aggressive-growth ambitions, Total is targeting 8% decreased capex (capital expenditure) spending in 2014. This is an effort to boost profitability. 

Of course ExxonMobil is planning its own 6.36% capex cut in 2014 and 17.6% cost reductions by 2015. Meanwhile Chevron is planning on a 20% production increase by 2017 while keeping capex constant.

Royal Dutch Shell bets on LNG, on an epic scale
Royal Dutch Shell is attempting to forge a comeback after several years of misfires. An example of this was the $5 billion spent at Beaufort, Alaska. After eight years (with no oil production), the company abandoned the project. Now a new CEO, Ben van Beurden, is at the helm and determined to steer a better course. 

The company is planning on selling $15 billion in assets between 2014-2015 and focusing on LNG exports and offshore drilling. This includes the construction of the largest ship in history, the Prelude, to act as a floating LNG liquefaction and tanker loading terminal. The estimated cost is 20% lower than land-based LNG export facilities, assuming the project can be accomplished on schedule and on budget. 

Companywide, management is targeting a 20% decrease in total capital expenditures for 2014 in order to increase profitability.

When it comes to increasing profitability Total, Royal Dutch Shell, Exxon, and Chevron are all planning on increased production and lower costs. This will increase margins across the board, raising "ok" margins to "good" for the European majors, but "good" to "great" for the American majors.  

Bottom line
Dividend-growth investors seeking a major oil company for safe and consistent dividend growth should not look to Total or Royal Dutch Shell. Instead, investors should look to their American counterparts such as ExxonMobil or Chevron. The slightly higher yields of the European oil majors are not enough to compensate investors for slower and less-reliable dividend growth, nor for their lower profitability. 

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

  

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers