We’re all feeling the pain of high petrol and diesel costs at the moment with prices at the pump hitting more than 150p per litre in some places. I know that some investors like to hedge their bets and own shares in companies that do well at the expense of the rest of us, so today I’ll be putting Royal Dutch Shell (LON:RDSA) through my investment checklist to see how it stacks up.
Safety of Principle
My first consideration is always safety. I don’t want to be taking on big risks and I don’t want to be kept up at night like Game Group investors, wondering if the company will go bust at any moment.
Diversity – Hold a diverse portfolio of diverse businesses
Diverse portfolio - One of the keys to staying safe is to stay diversified. I already hold BP shares in my portfolio, so I would need to think about whether I wanted to own another energy and petrochemical company. Generally I would say yes but that would be it. I wouldn’t want to own more than two very similar companies because they are often susceptible to the same risks; an example in this case would be falling oil prices.
Geographic diversity – This is also important, as it can help reduce the risks of being affected by a bad economy or disaster in one part of the world. Shell is a global company which has operations in over 80 countries, so it is very geographically diverse with about 40% of revenues coming from Europe, 30% from Africa and Asia and another 30% coming from North and South America.
Operational diversity - The final piece of the diversity puzzle that can be important is operational diversity which can aid operational robustness. What I’m looking for here is a company that preferably has many customers, suppliers, products and services.
What I don’t want is a company that relies on a single customer (like farmers selling to Tesco) or supplier (like a distributor who only distributes one company’s products), or a company that relies on one superhuman member of staff (like Berkshire Hathaway and Warren Buffett).
Looking at Shell, none of these factors are obviously a problem. There are many millions of customers, many sources of fossil fuel supply…
