I’m not the only one who thinks the Royal Dutch Shell (LSE:RDSB) share price is too low. Shell itself appears to as well, as it has just announced the third tranche of its share buyback programme, which commenced in July 2018.
This time the oil giant has committed to repurchasing up to $2.5bn of its own shares between now and April. Companies do this as a way of redistributing cash to shareholders when they see their shares as undervalued. The idea of a share buyback is that future earnings and dividends will be spread over fewer remaining shares, so share valuations and dividend income should rise over the long term.
Since July, Shell has invested $4.5bn in its own shares, and intends to lift that total to at least $25bn by the end of 2020, “subject to further progress with debt reduction and oil price conditions.”
What I like most about Shell is its dividend payout, and the company also confirmed on Thursday that it is maintaining its fourth quarter dividend at the same level as last year in dollar terms.
What we’re looking at with Shell is a yield now of around 6.4%, which I rate as one of the best in the FTSE 100. It’s not the highest available, but I’m more concerned with long-term reliability and keeping up with inflation.
As for reliability, Shell hasn’t cut its dividend even once since the end of World War II, it kept it going right through the oil price slump even when it was nowhere near covered by earnings, and with earnings recovering strongly, we’re now looking at reasonable cover once again. I don’t see an end to that trend any time soon.
As for inflation, well, we’ve seen no rises in the dividend for a few years now, but I can see rises resuming once the firm’s debt reduction programme progresses. And with the current payment level providing such a big yield right now, I could happily live with a few more flat years.
Oodles of cash
Looking at the rest of Shell’s fourth-quarter revelations, the company saw income attributable to shareholders grow by 47% over the fourth quarter a year ago, and by 80% for the full year. Cash flow in the quarter trebled since the same period in 2017, with the total for 2018 up 49% on 2017.
At the bottom line, basic earnings per share for the year jumped by 78% (and by 96% in CCS terms).
Chief executive Ben van Beurden said: “Shell delivered a very strong financial performance in 2018, with cash flow from operations of $49.6bn, excluding working capital movements. We delivered on our promises for the year, including the completion of the $30bn divestment programme and starting up key growth projects while maintaining discipline on capital investment. We paid our entire dividend in cash, further reduced our debt and launched our share buyback programme, with $4.5 billion in shares repurchased so far.”
Early market reaction was muted, and the shares are up around 3.5% at the time of writing. Since May last year, the market has marked Shell shares down by 15% as oil prices have weakened again, and I think that’s presenting us with possibly the best bargain in the FTSE 100 at the moment.
Shell shares are at the top of my ‘to buy’ list.
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Alan Oscroft has no position in any of the shares mentioned. 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.