The Shell (LSE: SHEL) share price has dropped more than 5% from March’s four-year high.
For me, this means that Shell shares are lower than deserved given the latest results, dividend yield, and growth prospects.
Q1 earnings better than last year’s
Given the recent fall in oil prices, consensus analyst expectations were for a marked drop in Shell’s Q1 earnings. But this was not the case at all.
There was only a very slight drop from Q4’s $9.8bn to $9.6bn in Q1. However, the more valid industry comparison is with the same quarter last year. This showed Q1 2023’s adjusted earnings outstrip the $9.1bn made 12 months earlier.
Generous shareholder rewards
After the 2022 results, Shell increased the Q4 dividend per share by 15% to 28.75 cents, bringing the annual total to $1.04. It also announced a share buyback of $4bn to be completed by the Q1 results announcement.
The latest results showed that this had been done, and more too. Overall, the company handed back over $6.3bn through buybacks and dividends in the latest quarter alone.
Another $4bn of share buybacks are planned for completion by the time of the Q2 results announcement. This would bring total shareholder distributions to around $12bn for the first half of this year.
The standalone dividend yields of the past few years provide a solid foundation for these additional payouts for shareholders. In 2022 the dividend yield was 3.5%, in 2021 4.4%, and in 2020 4%. In 2019 and 2018 the figures were 6.7% and 5.5%, respectively.
Oil prices aren’t the only story
It is a common misconception that oil and gas companies are badly hit when oil prices fall. For top companies, such as Shell, this is not necessarily the case.
These businesses can make as much money if oil and gas prices go down as if they go up. This is partly achieved through having unparalleled access to timely data on shipping routes, cargo pricing, and production and supply. It is also done by trading teams expert in risk management techniques, including hedging and shorting.
Hedging, of course, involves making trades designed to mitigate risks in existing positions. Shorting means selling something now with the expectation of being able to buy it later at a lower price.
According to oil industry estimates, Shell’s expert trading teams made around 20% of its entire earnings in 2022.
For me, the risks in the Shell share price are that lobbying by the anti-oil community may affect its operations. This might come from punitive taxes being levied against the firm, despite it paying $5.6bn in tax in Q1 alone. This was $2.1bn more than in the equivalent period in 2022.
Another risk is that it may be pressured into expediting its transition to cleaner energy. This could create failures in its energy delivery networks.
Ultimately, though, for me, any dips in Shell’s share price mean a buying opportunity. I already have holdings in the energy sector, with a good dividend yield and growth potential. But if I did not, then I would buy Shell shares today without any hesitation.
