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Stock Analyst Update

Shell Restores Full Cash Dividend, Shares Attractive

The company also increased its annual organic free cash flow target and reiterated its plans to repurchase shares during the next three years.

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At its annual management day,  Shell (RDS.A) announced it would restore the full cash dividend with the fourth-quarter payment. The decision came earlier than we expected, but is not entirely surprising, as we estimate Shell’s break-even at $50/barrel next year. However, it previously indicated further debt reduction towards its 20% gearing ratio would be a priority, but with gearing at 25% at the end of the third quarter and a subsequent $5 billion in asset sales proceeds, there is a clearer line of sight on its goal. Furthermore, the firm has generated sufficient free cash flow during the past four quarters to cover a full cash dividend, while oil has averaged $52/bbl.

Along with the dividend announcement, Shell also increased its annual organic free cash flow target by $5 billion to $25 billion-$30 billion for 2019-21 and reiterated its plans to repurchase $25 billion of shares during the next three years. The increase in free cash flow guidance is a function of greater confidence around its cost-cutting efforts and reduced operating cost base, strong project delivery, and derisking of volume growth over the next few years. It also announced plans to reduce the net carbon footprint of its energy products by 20% by 2035.

The increase in free cash flow and safety of the dividend relative to its yield were among the key tenets of our thesis on Shell. While the market has begun to recognize this potential, we still see shares trading at a discount. Our fair value estimate and moat rating are unchanged. 

Outside of the dividend announcement and updated guidance, the update largely served as a reminder of Shell’s strategy, which is unchanged. More mature businesses including refining and marketing, integrated gas, and conventional production will serve as the cash engines to fund dividends. Deepwater and chemicals will provide growth, with the former eventually becoming a cash engine, and with new energies and unconventional eventually serving as growth drivers post-2020.

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

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