When it comes to the question of which is the better long-term investment,Royal Dutch Shell(LSE: RDSB) has history on its side. Indeed, Shell can trace its roots back to theearly 1800s whenshopkeeper Marcus Samuel decided to expand his London business by selling oriental shells.
Of course, a lot has happened during the past 181 years, and Shell is completely unrecognisable today. Nevertheless, the companys flexibility and desire to adapt to the changing business environment is commendable.
Unilever(LSE: ULVR)is slightly younger than Shell, although the company can still trace its roots back to the late 1800s. Interestingly, Unilever was foundedby a combination oftwo family businesses of butter merchants, later merging with a major soap distributor. So, Unilevers business roots are similar to its main businesses today.
Plans for growth
It must be said that Shell has begun to flounder over the past decade, as the companys sprawling business empire has rapidly expanded. However, now the company is trying to slim itself down by selling of $15bn of non-core, low-return assets. Whats more, the group has restructured its North American operations, cut costs and removed additional management layers.
So far, the City has been pleased with Shells progress but ultimately the companys success isdependent upon the volatile price of oil. And this is Shells biggest pitfall when compared to Unilever. In particular, while Shell has almost no control over the price for which the company can sell its oil and refined products, Unilever can set a basic price for its soaps and foods. This price control allows Unilever to keep profit margins stable, accurately forecast income and continually improve the businesses return on investment.
For example, Unilevers return on invested capital, a key metric of business performance, has risen steadily over the past five years. Unilevers ROIC stood at 19.4% during 2009, rising steadily to 23.3% as of year-end 2013. On the other hand, Shells ROIC was 8% during 2009 but surged to 15.4% during 2011, falling back to 8% for 2013.
When investing for the long term, dividends are usually a consideration and Shell wins the dividend dependability battle.
Shell has paid and raised its dividend every year since the end of the Second World War, a commendable record. At present the company offers a dividend yield of 4.4%, the payout is covered one-and-a-half times by earnings per share. City analysts currently expect Shells payout to rise steadily in line with inflation over the next few years.
City analysts currently expect Unilever to offer a dividend yield of 3.3% next year, which is 1.1% below Shells offering. Still, City analysts expect Unilevers dividend payout to grow faster, with high single-digit growth pencilled in for the next few years.
A tough choice
It must be said that both Shell and Unilever both have many desirable qualities, but it I had to pick one, I would say that Unilever is the better long-term investment. Shells dependence upon oil, a finite resource, is concerning and the companys returns are erratic. In comparison, Unilevers returns are slow and steady, a highly desirable quality in a long-term investment.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.