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Stock in focus: Shell

Updated: Apr 30, 2020

Updates: Shell announce dividend cut for the first time since WW2 on 30th Apr. Current quarter dividends will be reduced by two-thirds to 16 cents per share from the 47 cents as compared to previous quarters.

Shell (Symbol: RDSA) has caught my attention recently with the share price falling to a level not seen since late 2016. Since the oil crash in 2016, its share price has hardly made any significant upside with the price hardly hitting above 70USD in this period.

However, what caught my attention is the dividend yield of Shell? At the current price level of 47.28 (as of 24 Feb), we are talking about a dividend yield of 7.65%! For income investors, such dividend yield definitely warrant a closer look. I did a deeper search into Shell's dividend history and I got to say I'm pretty amazed by it.

Shell has never cut its dividend since World War 2. That's a really impressive record, isn't it? For most of us, this could have mean that Shell has never cut its dividend for as long as we live. Also, the compound annual growth rate (CAGR) of its dividend has been 4.4% over the past 20 years. Granted it has not increase its dividend since the oil crash period from 2014 to 2017, it has also not cut its dividend during this difficult period when most of the other oil companies had begun cutting its dividends.

For the next 3 years, its current dividend is also predicted to be well covered by its earnings, with an estimated payout ratio of around 68%. In terms of financial health, its current debt is well covered by its operating cash flow with a value of 65%. Interest payments on its debt are also well covered by its EBIT with a value of 21.5X coverage. Current debt to equity ratio is also satisfactory at 34.1%.

With its financial health looking good with little possibility of having dividend cut, I find little reason to look away from a company with an Aa2 credit rating on Moody's, and a high dividend yield of 7.65% as of now. What's more, the current stock price is at an all time low for the past 3.5 years. This provides a greater safety net for my investment. This stock could work very well into my retirement plans as you can see on the article titled "What are my chances of success to retire at 40- from a data science perspective". In the article, I highlight that an investment with a high mean and low volatility is usually good for long term investing for retirement plans.

So what are the values for the mean and volatility for Shell stock? Assuming there is absolutely no price increase for Shell stock, we will just use its dividend yield of 7.65% as the mean. Now how about the volatility? Shell stock has a beta of 0.82 based on performance for the past 5 years. For those who are wondering what beta is, it's basically the measure of the stock's volatility as compared to the market. So, in general, the market has a beta of 1.0. Anything more than 1.0 represents a higher volatility than the market, and vice versa. Since the S&P 500 has a volatility of 16.16%, I will assume Shell stock has a volatility of 13.3%

With an annualised return (taking account only dividend yield) of 7.65% and a volatility of 13.3%, I now attempt to see what will happen if I decided to invest my retirement sum into Shell instead of S&P 500 at the age of forty. For those who have not read my previous article on "Can you retire at age 40?- from a data science perspective", do stop and read that article first before proceeding (otherwise you might not fully comprehend what I am doing below).

Assuming the same retirement factors (eg. retire at 40 and have enough money to last me till 100) as described in the previous article, what are my chances of success to retire at age of 40 and have money to last me till 100 if I invest my retirement sum of 500,000 SGD in Shell shares? (based on mean of 0.0765 and standard deviation of 0.133)

You can see that I have a 20 lower percentage points of retiring successfully at 40 and have money to last me till 100 if I were to invest in Shell instead of S&P 500. (Generally, the lower the percentile, the higher the chance of success. If the sum turns positive at 87th percentile, it means that only 14% of all simulated scenarios result in a successful outcome)

As you can see, the chances of success with full investment in Shell is really quite low here with only a 14% success rate. Of course, the mean used here might be too low as I'm assuming there is zero growth in Shell's share price in the future, hence skewing the results. Though, it might still be hard to see how it could beat the market with a difference of 20 percentage points.

The simulation results also explains why most people recommend investing in an index instead of cherry picking stock as you will likely fail to beat the market most of the times. Nonetheless, if you are feeling adventurous enough or think you made a damn good fund manager, you can still consider to include Shell as part of your portfolio in an attempt to beat the market as I honestly think it's one of the better income stocks in the market right now given its current price.

Now you may have noticed I did not do my usual analysis as seen on other stocks like Facebook or Nvidia for Shell. This is because I do not think Shell is a capital gain stock and hence the technical analysis or sentiment analysis might not work too well for such stocks. Instead, I choose to focus more on its dividends and how it could aid me in my retirement plans.

If you are considering to include Shell in your portfolio, you may be confused by the various "different kinds of Shell ticker symbols (eg. RDSA, RDSB)" you see in the various stock exchanges like NYSE and LSE. My recommendation is to go for RDSB on LSE instead as this will result in no dividend tax. If you were to buy on NYSE, you will incur a withholding tax of 30%. Similarly, buying RDSA on LSE will result in a withholding tax of 15% as RDSA has a Dutch source for tax purposes. RDSB, on the other hand, has a UK source for tax purposes and is not subject to any withholding tax. If you are investing in Shell for its dividend income, you surely do not want these taxes to be eroding your profits.

That's all for the analysis on Shell!

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