Sunday share tips: Royal Dutch Shell, Global Sustainable Farmland Income Trust

In her ‘Inside the City’ column for the Sunday Times, Jill Treanor wrote that after her appearance at the World Economic Forum in Davos last week, Greta Thunberg’s message should have reached every corner of every boardroom by now.

The implications, Treanor said, were likely being considered the most by the oil and gas sector, which is currently dealing with the inevitable shift to a low-carbon world.

“There are some investors who would be concerned that the capital being deployed in low-carbon businesses will not earn returns that would be as good as in the base businesses of these companies,” she quoted Jason Gammel at Jefferies as saying.

Gammel went on to note that the opposing argument was that if someone was concerned for oil and gas demand in the long term, energy plays that did shift towards low-carbon would be viewed as sustainable, and so their terminal value in five or 10 years could end up being higher.

At the moment, market watchers are continuing to debate which of those two outcomes will turn true, with Treanor describing Royal Dutch Shell, run by Ben van Beurden, as an old player that deserves credit for “trying to adopt” a new way of thinking.

The company has promised to spend up to $2bn (£1.5bn) per year on greener energy, which is a not insignificant part of the company’s annual capital expenditure of between $25bn and $30bn.

AJ Bell’s Russ Mould noted that one of the reasons the oil giant’s shares have lagged behind both crude prices and the FTSE 100 in the last year was what he called the “pushback against fossil fuels” among fund managers.

He did also point to the sagging natural gas prices, thanks to the boom in US shale fields, as well as a well-stocked oil market.

That oil market was likely to be reflected in the company’s fourth quarter numbers, which are due on Thursday, with analysts at Bernstein calculating that the $5-per-barrel difference in the oil price between the final quarter of 2018 and 2019 - $68 compared to $63 - would drag on earnings by around $750m in the quarter.

Treanor said another big question is the kind of impact Shell’s share buyback could have, with Bernstein working out that the firm has bought back around $15bn of the shares it pledged to since 2018, leaving it with around $10bn for the rest of the year.

Russ Mould said that another $125bn in returns to shareholders, via buybacks and dividends, was on the horizon between 2021 and 2025.

Jason Gammel said he believed Shell had the highest potential in the sector when it comes to cash returns, with the board not cutting the dividend at any point since the second world war.

“He sees value at these levels - last week the shares closed at £22,” Jill Treanor wrote.

“Shell could prove a good buy - but only for those investors brave enough to thumb their nose at Greta.”

Over in the Mail on Sunday, Joanne Hart said a growing population was seeing increasing demand for food worldwide, and at the same time climate change-precipitated fires and floods were becoming more common, meaning quality agricultural land was becoming more valuable, as were quality farmers.

In her 'Midas' column, she said the Global Sustainable Farmland Income Trust was designed to allow investors access to productive land and “pioneering” farmers globally, with the “first of its kind” trust expected to deliver total returns of between 7% and 8% per year, including dividends and capital growth.

The trust was setting its sights on floating at the end of February, with investors able to subscribe for shares until the 25th of that month with a listing price of $1 (77p) each and a minimum investment of $1,000.

Hart explained that the company was basing its accounts around dollars as much of its land would be in the US, and most crops are traded in the currency.

Its shares, however, would be listed in London, and dividends would be paid in sterling or dollars at the investor’s choice.

The trust was being established by three veterans - agricultural investment specialist Kristof Bulkai, rural property expert Ian Monks, and financier and ex-banker Sven Miserey.

Between them, the trio had already identified a portfolio of up to 30 farms, with 18 sites earmarked for purchase with a year.

It was keen to reduce dependence on a single crop or region, spreading its investments across locations including Tasmania, New Zealand, Portugal, France and Denmark, and was also staying away from commodity crops such as wheat and soy, and concentrating on fruit, vegetables and nuts.

The farms would also share certain common features, such as being close to a long-term, reliable water source, as well as having decent surrounding infrastructure and being able to deliver better-than-average yields.

Hart also wrote that farming was “in the throes of change”, moving from the do more approach of ploughing more, adding more fertiliser and using more pesticides to improve yields, to a situation where technology can help them.

“Sophisticated algorithms can show precisely how much fertiliser and pesticides individual crops need and there is increasing emphasis on disturbing the soil as little as possible because it captures carbon when left alone, so helping to reduce emissions.

“Robots are even being developed to weed the earth and pick crops, cutting the need for extensive ploughing and large numbers of manual labourers.”

She said farmers were adopting the “agtech” approach to improve their yields, reduce their costs and look after the environment, with the Global Sustainable Farmland Income Trust intending to work with such “forward thinkers” across its portfolio.

Most of the farms on the trust’s list had been in the same family hands for generations, Hart said, with a number of opportunities to take farms off the hands of farmers nearing retirement age, with no interested children to hand the family business over to.

Bulkai and his colleagues were “good owners”, she said, focussing on sustainable methods and bringing with them a “wealth of experience” as they looked to raise $300m on the stock market, with big institutional investors said to be “keen” to subscribe.

Looking at the data going back 40 years, US farms deliver an average annual return of 12%, which means the Farmland Income trust could deliver some “very tempting” rewards.

The trust was reportedly targeting dividend income of around 2.5% in the first year, as it bought up its portfolio of farms, with that income set to rise to at least 4.25% within a couple of years, based on rents it should receive from tenant farmers.

Managers were hoping to make additional annual payments as well, thanks to revenue share agreements on a number of farms, meaning the trust would be entitled to extra cash following good crop yields - which could take the total dividend income to over 5%.

“The Global Sustainable Farmland Income Trust should deliver healthy returns and provide access to a different type of investment, with a track record of success,” Hart said.

“For long-term investors, this float merits attention.”