It’s been a terrible year to own Shell (LSE: RDSB) shares. The stock has crumbled in value this year, falling a staggering 62%, which makes it one of the worst-performing investments in my portfolio.
However, I’m optimistic about the company’s outlook. The firm’s size, cash generation and growth plans suggest to me the stock is deeply undervalued at current levels. Today, I’m going to explain why.
Shell shares on offer
At the end of last week, Shell published its third-quarter results. The figures were a breath of fresh air for the company’s investors.
The headline number was 4%, which was the amount the company decided to increase its third-quarter dividend. After cutting the dividend earlier this year for the first time since World War 2, this was unexpected. Indeed, many analysts believed Shell’s investors would have to make do with the lower payout for years.
But that option is no longer on the table. Management has stated that Shell will target a 4% per annum dividend increase going forward. What’s more, management is promising additional cash returns when the group has hit its debt reduction goals.
This is a significant shift from Shell’s stance earlier in the year, and could significantly improve sentiment towards its shares.
As well as increasing its dividend, the group’s bottom line is back in the black. On a statutory basis, it reported a third-quarter pre-tax profit of $442m, up from a severe $23.9bn pre-tax loss in the second quarter.
Growing profits helped the organisation reduce overall debt in the period. At the end of September, group gearing was 31.4%, down from 32.7% at the end of June. These numbers suggest that slowly, but surely, Shell is cleaning up its balance sheet.
These are the reasons why I’m optimistic about the outlook for Shell shares. The company’s actions to cut costs and increase cash flow have helped stabilise the group, and shareholders should benefit in the years ahead.
In the meantime, following the recent dividend hike, the stock now supports a dividend yield of close to 6%. I believe this level of income looks highly attractive in the current interest rate environment.
As such, I think Shell shares look like a bargain buy at current levels. The company’s latest trading update shows the business is still churning out profits and reducing debt. This suggests to me the stock has been oversold in 2020. Therefore, the stock may offer a margin of safety at current levels.
On top of its capital growth potential, the firm’s dividend and cash return plan also imply investors may see high total returns from the stock in the years ahead.
Overall, I reckon one may benefit from buying Shell shares today in a diversified portfolio of blue-chip income and growth stocks.
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Rupert Hargreaves owns shares in Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.