Shares in Shell (LSE:SHEL) have climbed 166% over the last five years. But the stock is arguably more interesting to investors looking for passive income.
A focus on shareholder returns over investing in renewables has seen the stock leave rival BP in the dust. But is there still an opportunity in the FTSE 100’s largest oil major?
Dividends
Shell is on track to return £1.05 in dividends per share this year. That means an investor currently needs 953 shares to earn £1,000 a year in passive income.
It’s worth noting that this number has fallen sharply over the last five years. Back in 2020, the required number of shares was 1,408 – almost 50% more.
Since then, however, Shell has increased its dividend per share by quite a significant amount. And there are a couple of main reasons for this.
The first is that oil prices are much higher now than they were in 2020, when a pandemic-induced recession caused demand to evaporate. This is a big part of the story, but it isn’t the only factor.
Another major reason is the fact that Shell has used a lot of the cash it has generated to buy its own stock. As a result, the number of shares outstanding has fallen by around 22%.
That’s a big reason the dividend per share has increased by more than 50%. The firm as a whole is only returning around 19% more cash, but a lower share count amplifies this quite significantly.
When to buy?
It shouldn’t be surprising to see that changes in Shell’s share price have largely tracked changes in its dividend recently. But the extent to which this is the case is quite striking.
Given this, the question is whether investors have done better by paying a low price for a smaller dividend or a high price for a bigger one. And the answer is pretty clear.
Obviously, the best returns have come from paying a lower share price and waiting while the dividend grows. But even in the short term, buying low has generated better returns.
At today’s prices, 953 Shell shares would cost an investor around £24,825 (plus stamp duty). That’s actually quite a lot – especially compared to the situation five years ago.
Investors might have needed an extra 455 shares, but a lower share price meant collecting £1,000 a year in dividends in 2020 would only have required £14,572. That’s a much smaller outlay.
In other words, when Shell’s share price has been low, it has generated better returns in both the short and the long term. And that’s something investors should definitely pay attention to.
Investing in oil
Warren Buffett says that investing well is about being greedy when others are fearful. And while that applies across the board, I think it’s especially true of cyclical businesses like oil companies.
The performance of Shell shares over the last five years shows the stock market’s tendency to overreact to good and bad news. But this is what creates long-term buying opportunities.
Right now, I think investors looking to invest in Shell should be patient. The past isn’t always a reliable guide, but it’s difficult to see the stock as unusually cheap at the moment.
