As investors, we are searching for ways to build a nest egg to support a comfortable lifestyle in retirement. One popular strategy involves buying the stocks of top UK dividend-paying companies and using the distributions to acquire additional shares over time.
Fears of a US-Chinese trade war rocked equities last week and reminded many of us how interconnected global markets are. The word ‘dividend’ is probably one of the most popular words in equity investing, especially when markets are jittery. This is because unlike capital gains, which may be uncertain, dividends are a definite return that goes straight into an investor’s account.
Some companies have an excellent track record of rewarding shareholders with consistent dividends over the years. Shell (LSE: RDSB), the FTSE 100’s biggest company, has not cut its dividend even once since the end of World War II.
Diversified operations
On 2 May, Shell released its first-quarter 2019 results which beat analysts estimates. Profit of $5.3bn was down just 2% year-on-year but compared favourably with the $4.5bn forecast. EPS came at $0.65 and the results showed an impressive $12.1bn of cash flow. Management highlighted several projects for 2020 and beyond that are expected to impact growth positively.
The group’s diversified operations are divided into four main segments, Integrated Gas, Upstream, Downstream, and Corporate.
The first of these covers the production, marketing and trading of liquefied natural gas (LNG) and gas-to-liquids (GTL) products. This business also manages the New Energies portfolio – such as advanced biofuels, hydrogen and charging for battery-electric vehicles. Many analysts believe that the division will be a key driver of its long-term value.
Upstream activities include oil and natural gas exploration, field development, and production, while Downstream manages Shell’s manufacturing, distribution and marketing activities for oil products and chemicals. In other words, the downstream production process involves processing the materials collected during the upstream stage into a finished product.
The Corporate segment covers the non-operating activities supporting the group.
Demand, supply, quantity, and commodity prices all affect the earnings of an energy group. During the quarter, lower oil prices (with an average price of $63) have continued to be a significant challenge across the business. Yet strong contributions from trading helped offset the impact of lower oil prices.
And as the US tightens sanctions on Iran while we also approach the summer months, oil prices are heading higher – Brent crude is now over $70. Any uptick in the price of oil would help increase the company’s quarterly earnings.
In addition to strong operations from a diversified portfolio, the oil titan’s trailing price-to-earnings ratio of 11.2 is likely to catch the attention of value investors.
Looking after shareholders
Dividends and stock repurchases concern shareholders because they affect investment returns. Long-term Shell shareholders enjoy a current dividend yield of 5.9% even though the company, which had regularly increased its dividend until 2014, has held it steady since. And that looks safe as it has dividend cover of 1.4 times. The next dividend payment date is 24 June.
The company also announced that the board had approved a new tranche of share repurchases and will now buy back $2.75bn in shares before 29 July.
Foolish Takeaway
As a stable company that provides a more-than-respectable dividend yield, as well as potential capital appreciation, Shell certainly interests me.
