Why Royal Dutch Shell shares just dived to a three-year low

Weak results had already been flagged, but there are real concerns about the share buyback.

Royal Dutch Shell (LSE:RDSB) foresaw a difficult period of trading in 2019 when it issued a profit warning in December and this has indeed come to pass.

On most metrics, performance has slumped not just over the fourth quarter, but over the year as a whole, with a reduction in earnings, profit, refining margins and an increase in net debt giving headline headaches.

The weakness in oil and gas prices is, of course, a major contributor, while the general macro environment remains a serious challenge. Not only has the global economy teetered from the ongoing trade spat between the US and China, but oversupply in the former and the as yet unknown full impact of the coronavirus in the latter are unavoidable headwinds.

Meanwhile, capital expenditure is set to be at the lower end of expectations, which could temporarily crimp Shell’s ambitions in developing alternatives to the finite resource on which the company was formed.

Source: TradingView Past performance is not a guide to future performance

More positively, Shell’s record over the last turbulent few years has been one of financial housekeeping on a truly industrial scale. Divestments have been made with regard to non-core assets and indeed are currently expected to exceed a further $10 billion in the near future.

Revenues for the fourth quarter may have reduced by some 18%, but nonetheless exceeded expectations. The company’s ability to generate cash remains prodigious despite the challenges and the area of shareholder returns should provide some solace. The dividend, long since a stated financial priority for the group, has been maintained, with the dividend yield of 6.7% remaining a clear attraction, particularly in this period of historically low interest rates.

• 10 stocks generated by this simple Buffett-inspired strategy
• Income hunters can find great funds on ii’s Super 60 recommended list of investments
• US attack on Iran means opportunity at this oil giant

Shell is, however, more guarded on the outlook for the  share buyback programme, which had been a concern for investors. The company has maintained its commitment to the scheme – and at the levels previously announced – but has conceded that the pace of the buybacks could well slow depending on the external economic environment and its ability to reduce net debt. 

The potential for prospects remains evident but the current constraints are equally clear. Today’s weakness, exacerbated by a wider market malaise, adds to a fall of 9% over the last three months, with the weaker oil price and the profit warning both weighing heavily.

Over the last year, Shell has also underperformed, with a 5.5% decline in the share price comparing to a gain of nearly 8% for the wider FTSE 100 index. Results such as these tend to raise questions about the company’s reputation as a core portfolio constituent, although, taking the longer-term view, the market remains doggedly upbeat on prospects, with the consensus still coming in at a "buy".