The last month I've blogged several times about my wish to diversify in European companies to reduce my exposure to changing EUR.USD-rates. However, it is more important to buy companies with great quality, sound business fundamentals and with a lasting commitment to shareholders. I think I've combined these traits in my purchase of Royal Dutch Shell.
Royal Dutch Shell
Royal Dutch Shell
(Sourced from Google Finance) Royal Dutch Shell plc (Shell) is an independent oil and gas company, based in the United Kingdom. It operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas, the liquefaction and transportation of gas, the extraction of bitumen from oil sands and converting it into synthetic crude oil, and wind energy. Downstream segment is engaged in manufacturing, distribution and marketing activities for oil products and chemicals, alternative energy (excluding wind), and carbon dioxide (CO2) management. Corporate segment represents the key support functions, such as Shell’s holdings, treasury and self-insurance organization.
Strategy in 2014
Shell was struggling in 2013. Earnings have dropped significantly. The new CEO (Ben van Beurden) blames security issues in Nigeria, production delays in big projects and lower gas prices in North America. He mentions: "...we have lost some momentum in operational delivery, and we can sharpen up in a number of areas”. Their agenda for 2014 is based on three priorities:
- Improved financial performance, including restructuring in some areas of the company
- Enhancing capital efficiency, with hard choices on new projects, reduced growth investment, and more asset sales
- Continued strong delivery of new projects, and integration of recent acquisitions.
This is not a U-turn in strategy but definitely a change. For instance, capital spending will be reduced in 2014. In 2013, this totalled $46 billion. In 2014, Shell expects total capital spending of around $37 billion. Finally they have continued to express their commitment to shareholder by raising the dividend for Q1 to $0.47 per share, a raise of 4%.
The business fundamentals and balance sheet of RDS look fine.
- Low debt / equity-ratio (~ 0.2)
- High interest coverage ratio (almost 40x)
- Great credit ratings
- Great dividend yield of 5.2%. The dividend was frozen between 2009-2011, but has since been raised by 2%, 5% and 4%. Even though this raises are somewhat small, the yield to begin with is twice as high as XOM.
- Average valuation (PE < 10)
I don't know RDS is a better Oil/Energy company than ExxonMobile or Chevron (or the other way around for that matter). What I do know is that RDS has been around for a long time and will be around for a long time to come. I see this purchase as a diversification in this sector. I now own both XOM and RDS so in that sense I don't care which performs better. It's just another step in owning a diversified portfolio of high quality companies in each sector of the economy.
I've deposited €1.500 in fresh new capital for this purchase. My purchase of 58 shares of RDS.A will provide me with a yearly dividend of around €80. The downside of this purchase is that RDS declares dividends in USD. So this purchase does not address the fact that I would like to diversify my quarterly dividend payments away from USD towards EUR.
My forward annual dividend income is now € 574.