LONDON -- It's time to go shopping for shares again, but where to start? Motor insurance warship Admiral Group? Pipeline prince National Grid? Or current fashion flop Burberry?
There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy Royal Dutch Shell (LSE: RDSB.L ) ?
To Shell and back
By just about every definition, Royal Dutch Shell is a blue-chip behemoth. Last year, it was the world's second-biggest company as measured by revenues, behind ExxonMobil and ahead of Wal-Mart and BP. This Anglo-Dutch company, which has its registered office in London, is currently the fourth largest company listed on the FTSE 100 by market capitalization, after HSBC, Vodafone, and BP, and pumps out a mind-boggling 3.1 million barrels of oil equivalent per day. By all measurements, Shell has size on its side. But should that tempt me to buy it?
Oil, oil everywhere
I already own Shell, and I bet you do as well. In fact, I own it several times over, as a direct equity, as part of a FTSE All-Share tracker, a FTSE 100 ETF tracker, and at least one actively managed equity income fund. Before filling up on such a major constituent of the FTSE 100, always check how much exposure you already have. I'm not too concerned, because oil still drives our world, and will continue to do so for years to come, until alternatives such as solar or thorium or algae become serious competitors. If they ever do.
The oil majors don't necessarily give you a direct pipeline into the rising oil price. Royal Dutch Shell is a vertically integrated company, whose activities include refining, distribution and marketing, petrochemicals, power generation, trading, transportation, storage, and, with 44,000 gas stations worldwide, retailing. All these are subject to countless variables, far beyond the oil price.
Nor does the sheer size of Shell inoculate it against global economic worries. Its second-quarter profits fell a shocking 13% to 3.6 billion pounds, against City forecasts of 4 billion pounds, as energy prices dropped. Production figures were flat, although chief executive Peter Voser is targeting 4 million barrels a day by 2017. Third-quarter results will be published on Thursday, when analysts predict a 10% rise in profits on the previous quarter, but 10% below the same quarter last year.
Fill up on Shell
The search for oil is getting ever trickier -- and political. Shell is looking to expand in Russia, never an easy task. Last month, it delayed its Arctic exploration campaign until 2013, to give it time to repair a broken containment dome. It also faces legal battles in Nigeria, where farmers claimed Shell has poisoned their land and their health. The days of easy oil wealth are coming to an end.
At its current price of 12.72 pounds, Shell is nearly 13% below its 52-week high of 14.89 pounds. That puts it on a tempting price-to-earnings ratio of 8.4 times earnings, plus that slick yield of 4.8%. When the global economy recovers, Shell should start motoring again. If you don't have it in your portfolio, and you think a recovering world will be thirsty for oil, now looks like a good time to fill up.
He sells Shell
Not everybody agrees. Neil Woodford at Invesco-Perpetual sold Shell (and BP) last year, citing the increasing difficulty of finding oil. He says there are better opportunities elsewhere, and you can find out what they are by downloading our free, in-depth report, "Eight Top Blue Chips Held by Britain's Super-Investor."
The report by Motley Fool analysts is completely free and shows where dividend maestro Woodford believes the best high-yield stocks are to be found today. Availability of this report is strictly limited, so please download it now.
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Further Motley Fool investment opportunities:
- The One U.K. Share Warren Buffett Loves
- 8 Shares Held by Britain's Super-Investor
- How to Unearth Great Oil and Gas Shares