Shell dividends now at a ‘more meaningful level’, says CEO

• Royal Dutch Shell PLC 'A' (LON: RDSA) and 'B' (LON: RDSB) shares rallied to a one-month high of 1,473p and 1,458p respectively on Thursday (29 July 2021)
• The energy group raised dividends by 38% last week, after its second quarter profit surged 71% quarter-on-quarter
• It also announced that it would be repurchasing US$2 billion worth of shares this year
• One analyst said the dividend increase was ‘significantly above expectations’
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Shell stock price: what’s the latest?

Royal Dutch Shell shares jumped as much as 5.1% last week, after it reported its second quarter results and interim dividend.

The global energy company’s market value is up some 9% in the past two weeks alone, and nearly 11% on a year-to-date basis.

Despite the positive trend, the stock is still trading at least 30% under its pre-pandemic 50-day simple moving average price of around 2,200p a share.

What are the positives from Q2 earnings?

Shell posted adjusted earnings of US$5.53 billion in Q2 of 2021, representing its highest group profit since the fourth quarter of 2018, as well as a quarter-on-quarter increase of 71%.

Furthermore, this was in excess of analysts’ predictions for adjusted earnings of just above US$5 billion.

Due to the outperformance, the company’s board has decided to increase dividends per share (DPS) for the quarter to US$0.24, which is a 38% increase from the previous quarter.

Additionally, it will rebase dividend payouts for the subsequent quarters to US$0.24 a share, keeping its original target to grow DPS by 4% annually unchanged.

But perhaps what was most notable was the fact that the oil major announced it would be buying back roughly US$2 billion worth of shares in the second half of 2021.

Although share buybacks are typically financed with debt, which can strain cash flow, Shell was able to reduce its net debt by US$5.5 billion to US$65.7 billion this quarter, while growing cash flow from operations (CFFO) by 12% to US$14.2 billion.

As Chief Executive Officer Ben van Beurden said during the earnings call: ‘We wanted to signal to the market the confidence that we have in cash flows.’

How do analysts view the results and share buyback?

‘We knew Shell was set to raise distributions today but the scale of the increase is significantly above expectations,’ Redburn analyst Stuart Joyner wrote in a note following the earnings report.

Van Beurden defended the dividend amount, saying that it is now at a more ‘meaningful level’ in relation to the free cash flow of US$9.7 billion generated for the quarter.

In terms of price target and stock rating, UBS Group’s Jon Rigby reiterated a ‘buy’ call and price estimate of 1,860p.

He had previously noted that higher shareholder distributions were ‘largely in line’ with the firm’s expectations.

Berenberg Bank analyst Henry Tarr raised his price target to 1,720p from 1,570p previously, alongside a ‘buy’ rating, while Morgan Stanley’s Martijn Rats also lifted his firm’s price target to 1,865p from 1,815p with an unchanged ‘overweight’ rating.

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