It has been an interesting start to the year. From the doom and darkness of January to the sunshine and hope of spring. January seemed to go on forever. The darkness and lockdown did not help. The days were all the same. There was no end in sight. But as I type this, I ask myself the question ‘ where has the time gone?’ I can’t believe we are already a quarter of the way through the year. Time seems to be flying. Having not done or achieved much doesn’t help in that sense. But I do hope better days are ahead.
In terms of the markets, Quarter 1 was a rollercoaster. Though the markets as a whole have mostly treaded higher, individual names and asset classes saw wild swings. From GameStop to Bitcoin and all the meme stocks in between, investors in these will tell you it’s been no smooth sailing.
Quarter 1 also saw the continued rotation from quality growth stocks towards cyclical value stocks. There was a huge sell off in US listed mid-cap technology names but looking at the tech heavy Nasdaq index would give you no inclination of that as the major constituents, the large tech stocks, held their ground. The markets are increasingly polarised and irrational. Investors will need to navigate the next few month with eyes wide open.
In terms of dividends, the taps are being turned back on. Last year was full of dividend cuts but there is finally light at the end of the tunnel. Research by investment firm AJ Bell suggests FTSE 100 firms will hand dividends worth a total of £74.3bn this year – up from £61.4bn last year.
In quarter one, I received dividend totalling £1,080. Last year, the figure was slightly higher with £1,150 coming my way. All the dividends cuts faced from the likes off Imperial, BT and Shell have taken their toll.
It can be hard seeing company after company sash their dividend figures. But one needs to act rationally and intelligently. One needs to look at what is happening in the underlying business. It is one thing for a dividend to be cut because of deteriorating business fundamentals and it is another if it is cut due to capital allocation purposes. In the case of Imperial and BT, it is the latter with Imperial looking to cut debt and BT looking to increase infrastructure investment for the future.
Shell on the other hand is more of a conundrum. It cut its dividend due to declining business fundamentals as well as needing the cash to invest in the future green agenda. I would be lying if I said the dividend cut from Shell didn’t shock me. I guess in investing nothing should be shocking but this comes close.
Shell had a beautiful history in which it boasted that it didn’t have a dividend cut since World War 2. Just think about that for a minute. For a period of 75 years, Shell did not cut its dividend. This is remarkable considering Shells operates in a hugely cyclical industry.
During this period there has been multiple recessions, including the worst meltdown since the Great Depression, the dot-com bubble and the housing bubble, the Asian financial crises, multiple international wars, the 1973 oil crises, ballooning government deficits, exploding national debt, countless natural disasters, political earthquakes and a maelstrom of regulatory changes in the financial industry, and Royal Dutch Shell still managed to maintain its dividends during each of those years. This is truly amazing and testament to Shell and its management.
I figured that Shell was strong enough to get through any crises. But clearly I was wrong. I didn’t see what was coming. Bans on travel, work from home and outright economic shutdown totally decimated Shell’s business. Never in a million years did I see countries of the ‘free world’ shutting down their economies but there you go. And as the world travelled less and got online more, the question needs to be asked, Is shell still one of those 100 countries that I could simply buy and tuck in the bottom drawer. These questions now need to be asked.
To understand how increased global prosperity and the emerging middle class will affect oil, we need to look at nations that are already developed. Nations that have a high standard of living and industrialised economies.
Today, the U.S. is the largest consumer of oil on the planet. The U.S. uses about 7.2 billion barrels per year, or nearly 20 million barrels per day.
Another ‘first world’ country, Japan, also uses copious amounts of oil, around 1.8 billion barrels per year or nearly 5 million barrels of oil per day.
Together, these two countries alone consume 25% of all oil produced globally. Yet when you zoom out you realise that the total population of both countries is only around 450 million people – around 6% of the world’s population.
Meanwhile, China has a population of nearly 1.4 billion. It uses 4 billion barrels of oil per year – about 11 million barrels per day. In other words, the U.S. – with a population about one-fifth the size of China – consumes almost two times more oil. And this is where it gets interesting. China is in the middle of another industrial revolution. Poverty is decreasing, and the middle class is growing. The standard of living is on the rise. The Chinese are driving cars and scooters, watching TV, using a lot of electricity, and making a lot of stuff. By next year, China is set to overtake the U.S. as the world’s largest importer of crude oil.
The story of china is truly amazing. China’s economy has grown 900% since 1999. Over that period, it has grown to be the world’s second-largest economy at more than $10 trillion. Instead of bicycles crowding the streets, the Chinese are driving cars and scooters. Vehicle sales have exploded, and demand for oil has nearly tripled in the last 20 years alone. And it is still growing.
And if you think China is promising, you ain’t seen nothing yet. For as big of a catalyst as China will be for oil prices, India has even more potential to move the needle. There are around 1.3 billion people in India – around three times the combined population of the U.S. and Japan. India uses 1.5 billion barrels of oil per year, or about 4.1 million barrels per day.
That’s just a fraction of the oil used in China. But India is expected to add another 241 million “people of working age” by 2030. And you can bet that most of them will be driving cars, watching TV, and making stuff. Soon, India will pass China to become the world’s highest-populated country. Because of this India is expected to be the fastest-growing consumer of crude oil in the world through 2040, adding 6 million barrels a day of demand.
Countries all across the world, as they become more prosperous, will use more oil. The world is far away from eradicating its thirst for oil.
Looking at the share price of Royal Dutch Shell today, it does not factor this potential. Instead, it can be argued that the share price is factoring a lot of negativity at present. At current prices, I would not even think of selling my shares of this giant oil conglomerate.
Even with shares of Shell being in the doldrums today, and even with the dividend cut over the last year, my shares In Shell are still up over 30%. Not a bad return for a business that had its worst year in a very very long time.
And this brings be to another point, the price you pay matters. RDSB stock doesn’t make sense to purchase over £20. But under £10, it is a steal. You will not make money by consistently paying more for shares than there are intrinsically worth. On the other hand, if you buy below intrinsic value, you have a margin of safety ensuring that even in the worst case you do not lose money.