In 2013, the year before oil prices began to slide, shares of Royal Dutch Shell traded at an average price of $63.22. The shareholders of the dual-listed British and Dutch oil juggernaut collected $3.60 in 2013 dividends, $3.76 in 2014 dividends, $3.76 in 2015 dividends, and $1.88 in dividends through the first two quarters of 2016.
All in all, it’s been in investment that has thus far generated exactly $13 in dividends since the February 15, 2013 record for that year’s first-quarter dividend. WIth Royal Dutch Shell Class B shares trading at $50.25 as of Friday’s after hours trading, the investor that has owned the stock in a tax-advantaged account since the first quarter of 2013 has now broken even on the investment with a three cent gain for each share.
I mention all of this to say that headlines are very different from reality. Many people have correctly identified that the supply of oil has been unusually high these past three years, and it has meant that integrated oil companies have needed to borrow at 3-5% long-term interest rates in order to fully fund a combination of projects/capital expenditures and their dividends to shareholders. Upstream companies like Conoco have cut their dividend, and still struggle at this point in the business cycle as all dividends are by definition unfundable with profits when you’re losing a billion dollars.
But as I noted with the Chevron case study, this oil price downtick hasn’t created the destruction of net worth for large-cap portfolios that you would expect based on all the criticism of investments in the sector and the fact that the price of the commodity is down over 50% compared to where it was three years ago.
The tone that I pick up from many comments in oil stock investment forums is that stocks are like a game of gin rummy where you discard any business that hasn’t increased your net worth lately or generally suffers from negative sentiment in the marketplace. That’s a terrible way to behave because it effectively states that you will sell great businesses when they become undervalued or experience the typical vicissitudes of their sector.
It is a wise to analyze the shortcomings of your investment positions–for instance, Royal Dutch Shell shareholders would have been much better served if the firm entered this oil glut with a freakishly strong balance sheet like ExxonMobil rather than a moderate debt load on the eve of industry hardship–but the recognition that shortcomings exist should not lead to the abandonment of ownership positions in companies that have a very high likelihood of producing cash profits for generations.
Jeremy Siegel was right about the effect of dividends as a bear market protector. There are very few analysts that like Royal Dutch Shell right now, even though there are less than two dozen companies in existence that have outperformed it since 1956. The best way to get over the psychological burden of owning dogged investments is to commit to own cash-producing assets for a few years, and then study how those cash returns intermingled with your core position a few years.
If I told you in 2013 that your downside protection was that “the product the firm sells could fall in half and you’d still break even”, you’d probably figure you were doing the risk-adjusted return thing right. By the end of the year, Royal Dutch Shell will have paid out $14.88 per share in cash dividends since the start of 2013. It has required the trade-off of borrowing, but it’s been a heck of a successful perk amidst industry malaise. What is crazy is that this analysis even understates the effects of Royal Dutch Shell’s reinvestment substantially, as it doesn’t account for dividend reinvestment nor does it examine what the picture looks like for someone that has been sittting on shares for a decade and reinvesting dividends.