This Energy Stock Has 'Royal' Dividends

Just because oil stocks have been out of favor lately as they have trailed the broader market, investors should not be too quick to write off the energy sector. Case in point is Royal Dutch Shell . We think this stock is primed for high shareholder returns. One of the largest energy companies in the world, Royal Dutch Shell is ramping up multiple new projects that should fuel significant cash flow growth over the next few years, even if oil and gas prices remain weak. Plus, Royal Dutch Shell has a current dividend yield above 6%, a highly attractive yield at a time when the S&P 500 Index, on average, yields less than 2%. As a result, we view Royal Dutch Shell as a high dividend stock worth buying for income investors. Business Breakdown: A and B Royal Dutch Shell is an oil and gas supermajor, the second-largest behind Exxon Mobil in terms of annual production volumes among publicly-traded oil stocks. Royal Dutch Shell has a market capitalization of $231 billion. Royal Dutch Shell is headquartered in London, as well as in the Netherlands. There are two types of shares of the company; RDS.A shares, listed in the Netherlands, and RDS.B shares, listed in the United Kingdom. The advantage of the B-shares for U.S. investors is that there is no withholding tax on dividends received from companies headquartered in the United Kingdom. Royal Dutch Shell is an integrated oil company, which means it has operations across the oil and gas spectrum. Specifically, it operates upstream exploration and production, midstream storage and transportation, and downstream refining businesses. Each business contributes positively to Royal Dutch Shell's profitability, and its integrated structure also provides some protection during periods of low oil prices. In late October, Royal Dutch Shell reported financial results for the third quarter of fiscal 2019, showing that production remained essentially flat, at 3.6 million barrels per day. Adjusted earnings of the company fell 15%, to $4.9 billion from $5.8 billion, due to lower oil and gas prices as well as weaker refining and chemicals margins. Shell partly offset the effect of adverse commodity prices with profits from trading of liquid natural gas and refined products. Impressive Project Lineup Shell has maintained strong profitability and cash flow, even in a period of weak commodity prices, due to its capital discipline. Shell divested roughly $30 billion of assets from 2016 to 2018. These were assets with lower return profiles, and were not deemed critical to the future direction of the company. With the proceeds, Royal Dutch Shell can pay off debt, support its dividend, and reinvest in more attractive projects. Shell refers to this process as high-grading its portfolio, and the efforts have made the company more efficient. Even though oil and gas prices remain well below their multi-year highs, Royal Dutch Shell should continue to grow its cash flow moving forward, thanks to its lineup of new projects. Shell made significant advancements across multiple projects throughout 2019. Projects currently under construction are expected to boost 2019 production by over 300,000 barrels per day. And, Royal Dutch Shell's core lineup of new projects is expected to add $5 billion of annual operating cash flow by 2021. In addition, Royal Dutch Shell's large buyback program will boost earnings-per-share growth, by reducing its share count by around 10% over the next three years. The company expects to use $25 billion for share buybacks by the end of next year. Moreover, during the downturn of the energy sector, Shell drastically reduced its operating expenses and invested in high-quality, low-cost reserves, which have rendered the company more profitable than in the past at a given oil price. Shell posted record organic free cash flows of $31 billion last year, even though Brent was about 40% lower than it was before the 2014 to 2016 industry downturn. Overall, we expect Royal Dutch Shell to grow its earnings-per-share to $6 by 2024 for an annualized growth rate of 8.5% over the next five years. The company's future earnings-per-share growth will be due to buybacks, its high-quality reserves and small expected increases in prices of oil and natural gas. A Future of Shell-ing Out Dividends Royal Dutch Shell has put in place multiple initiatives to improve its fundamentals and financial strength, including divestments, cost cuts, and investment in high-quality projects. Because of this, the high dividend payout, currently yielding 6.4%, appears safe for the foreseeable future. Royal Dutch Shell has a proven history of maintaining its dividend, even during difficult periods. For example, the company survived both the Great Recession of 2008 to 2009, as well as the 2014 to 2016 downturn in oil and gas prices. Fundamentally, Royal Dutch Shell expects its annual free cash flows to remain around $30 billion from 2019 to 2021. As this amount is twice as much as the dividend, the dividend seems safe. In all, Royal Dutch Shell sits in a prime position to continue rewarding shareholders with rising cash flow and dividends. At the same time, the company will be among the biggest beneficiaries, if oil prices turn higher.

This Energy Stock Has 'Royal' Dividends

Royal Dutch Shell offers over a 6% dividend yield and is in growth mode.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/23/2020

Let's Talk About Why Cash Is King

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.