Will slowing share buybacks hurt the Shell share price?

As investors look set to take a hit with the share buyback programme being adjusted, what could be the impact on Shell stock?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Though income and growth stocks are often seen – with very good reason – as separate entities, when we’re looking to invest, it’s nice to have both characteristics. Dividends play a major role in the attractiveness of an income stock and thus the ability to grow its share price. 

It was only natural then, that when I saw news recently that Royal Dutch Shell (LSE: RDSB) will be “slowing investor payouts” after its earnings dropped 50%, I was worried the fallout could be bad for the stock. Looking closer however, I am not so sure it will be a long-term problem, at least if it can get its earnings figures back on track.

The numbers

A 50% drop in profits is bad news for any share, and there’s no getting around that somewhat obvious fact. The underlying problem that caused it, however, is far more fundamental to a company’s future than the simple fact of the fall. In the case of the latest numbers from Shell, the list of reasons all really boil down to one thing – lower oil and gas prices.

Shell cited “challenging economic conditions”, as well as weak refinery margins, and oil and gas prices as causing the drop, but in essence these are all the same thing. Challenging economic conditions means less demand for oil, and lower oil prices. Lower prices also usually mean the margins for refined products are narrower.

The 50% headline figure was for Shell’s fourth-quarter earnings – its full-year numbers show earnings (actually net income adjusted for cost of supply, Shell’s preferred profitability measurement) falling 23% for 2019.

Buybacks and dividends

So what’s Shell doing now that might affect investor returns? Following the results, it made what I actually believe to be the sensible decision to slow the pace of its planned $25bn buyback programme. This was a contingency it had always said was a possibility.

It’s also worth noting that this is a slowing of the buyback, not a halt. Indeed, Shell has already completed $15bn of share repurchases, and now plans to buy back $1bn of shares between January and the end of April, as opposed to a planned $2.8bn.

And we should not ignore the fact that though the lower earnings certainly put Shell’s dividend at more risk, as yet there have been no plans to reduce the payout. Shell has one of longest and most consistent dividend schemes of any UK company, which offers me some comfort that reductions will only come if absolutely necessary.

I think this slowing of the buybacks may hurt the price a little, but as my colleague Paul Summers rightly pointed out, nobody is buying Shell stock to make large capital gains. Instead it is an income stock, and a safety investment.

So looking at Shell as an income stock, I think this latest news has potential to offer a dip-buying opportunity. Shell’s price has been pretty strong for the past year or so, and if it does see a short-term decline, it might be a perfect chance to buy some shares.

I will be keeping an eye on the oil price as a guide — Shell needs Brent crude at about $66/bbl this year and if this happens, I think it means Shell stock could be oversold.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

The Motley Fool UK has no position in any of the shares mentioned. Karl has shares in Royal Dutch Shell. 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »