Shares of Royal Dutch Shell plc (NYSE:RDS-B), one of the world's largest integrated oil and natural gas companies, have handily bested shares of the company's peers so far this year. However, although the dividend yield Shell offers investors is still huge at over 5.7%, it's no longer as great a deal as it once was -- which is why you should be asking if it's time to move on from this oil giant. Here's what you need to know.
Two issues that have dogged Shell in recent years are debt and project execution. Things got particularly bad on the debt side when the oil major decided to spend roughly $50 billion to buy BG Group during the oil downturn; that pushed debt up by around 50% in 2016 alone. Other oil companies used their balance sheets during the downturn to support capital investments and dividends, but Shell's move was bold and potentially risky.
On the execution front, Shell has had some high profile misses in recent years, including a now abandoned plan to explore for oil in the Arctic. The best example of the problem, however, is probably the company return on invested capital, which has been toward the low end of the peer group for some time.
Concerns like these pushed Shell's price to tangible book value to a decade-low at the start of 2016. But the energy player has made great progress since then. For example, after the BG deal, it laid out plans to sell $30 billion worth of non-core assets so it could reduce its debt load. It is close to fulfilling that commitment already. And return on invested capital has started to move higher, closing the gap with industry leaders like ExxonMobil (NYSE:XOM). The company is targeting 10%, which would be higher than what it achieved when oil prices averaged $90 a barrel.
A healthy rebound
It's no wonder, then, that Shell's stock has rallied this year, as its progress has become increasingly obvious to investors. The stock is easily the best performer in its peer group, advancing over 12%. For comparison, Exxon's stock price is down 7%, and Chevron's has fallen about 1%.
However, the biggest change is to be found in Shell's price to tangible book value. It has moved up from a decade low toward the high end of the range it's occupied for the past 10 years. That doesn't mean Shell is expensive, per se, but it certainly isn't as good a deal as it once was. Meanwhile, ExxonMobil's price to tangible book value remains near decade lows, suggesting a much better opportunity for value conscious investors.
So if you are looking to buy an integrated oil giant today, Exxon would be a better option than Shell, valuation-wise. That said, Shell isn't exactly expensive today; it's just less of a value than it was at the start of 2016. With Exxon's yield at 3.6% (or so), income investors could be forgiven for choosing Shell over Exxon.
Hold or fold
But what if you were lucky enough to buy Shell when it was trading at a much lower price? I wouldn't run for the exits if I were you -- Shell has made real progress in key areas, but that should only continue in the months and years ahead. That suggests continued improvement in the company's fundamentals and the potential for further share price gains, or at least the ability to hold onto existing hard-won gains. With a still robust yield, you'll be well rewarded for simply sticking around.