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Stock Strategist

More Dividends Come Out of Shell

The supermajor has introduced a new framework for shareholder returns.

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Shell’s (RDS.A)/(RDS.B) third-quarter adjusted earnings improved from what was probably a trough in the second quarter but remained 80% below the year-ago level as global economic weakness caused by the pandemic continued to weigh on commodity prices. However, Shell did see a strong improvement in free cash flow generation while reducing gearing levels from the previous quarter. It also announced a 4% increase in its quarterly dividend to $0.1665 per share and introduced guidance on future shareholder returns. Future increases will be subject to board approval and dependent on further net debt reduction to $65 billion from $73.5 billion currently. Once that is achieved, Shell will distribute 20%-30% of operating cash flow to shareholders through progressive dividend growth and share repurchases. Remaining cash will go toward capital expenditures and additional debt reduction with the goal of achieving AA credit metrics through the cycle. Capex will remain at $19 billion-$22 billion in the near term with a target of $4 billion in asset sales annually.

The company plans to further focus its portfolio by reducing its refining portfolio from 14 sites to 6 by 2025, with those remaining integrated with chemicals. It previously targeted a reduction to 10. Upstream will be focused on nine core positions that contribute more than 80% of upstream operation cash flow. The remainder of the portfolio will be operated under a new lean model in which each asset is developed, managed for cash, or divested. Shell will present greater detail on its plans in February 2021. We plan to incorporate the latest results and guidance into our model but do not anticipate a material change to our fair value estimate or narrow economic moat rating.

Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.