Royal Dutch Shell (LSE: RDSB) has been one of the UK’s top income stocks for many years, and today the company has unveiled plans to go even further by promising cash returns of up to $125bn to investors between 2021 and 2025.
At current exchange rates, this $125bn target translates into just under £100bn, around 50% of Shell’s current market capitalisation of £201bn. That’s why I believe the stock has the potential to return 50% or more of its market value to shareholders over the next six years.
Cash generation
Since 2014, after the price of oil crashed below $30 a barrel, Shell’s management has been working non-stop to increase the company’s efficiency, profit margins and cash generation. Even though the price of the black stuff has since recovered (it’s dealing at around $61/bbl at the time of writing), management is still focused on keep costs low and cash generation high.
Updating investors on the company’s strategy for the next six years to 2025 today, Shell revealed that it is targeting $35bn per annum of free cash flow generation from now until 2025, based on the assumption that the price of oil remains at $60/bbl or more.
Even though it hasn’t been plain sailing for the group over the past five years, Shell has continued to prioritise shareholder returns. The company recently started a $25bn share buyback, which it now expects to complete in 2020. It returned $52bn in dividends to shareholders between 2011-2015 and is planning a total of $90bn between 2016-2020. At the same time, the firm has paid down debt, continued to invest in growing production and started building a renewable energy business.
Going forward, as well as the $125bn of cash returns to investors, Shell is also targeting average annual capital spending of $30bn per annum between 2021-2025 (excluding acquisitions) while keeping borrowing low. This spending should allow the company to continue to invest for the future, build out its power supply business, renewable energy division, energy trading arm and downstream operations, helping the enterprise prepare for the future.
An excellent acquisition for any portfolio?
Based on this update from the company today, it looks to me as if Shell is firing on all cylinders once again after a mixed few years.
That’s why I think the stock could be a great addition to any portfolio. Dealing at a forward P/E of 11.6 with a dividend yield of 5.8% at the time of writing, the shares look too cheap when we factor in the group’s potential cash generation between now and 2025. I reckon any company planning to return more than 50% of its market cap to shareholders over the next six years should be worth a mid-teens earnings multiple.
On a free cash flow basis, assuming annualised free cash flow of $35bn, at current exchange rates, the stock is dealing at a free cash flow yield of just under 14%, which is a steal in my eyes.
