Shell’s (LSE: SHEL) share price has seen no sustained positive impact from what I thought were strong Q3 2024 results.
Adjusted earnings (the firm’s net profit number) rose 12% year on year to $6.03bn (£4.76bn). They also outstripped analysts’ estimates of $5.36bn.
Positively as well was a 13% fall in its net debt to $35.23bn – now at its lowest since 2015. Another boost was that cash flow from operations increased 19% year on year to $14.68bn.
Are the shares undervalued right now?
Analysts forecast that Shell’s earnings will increase 5.5% a year to the end of 2026. And it is ultimately earnings growth that powers a company’s share price and dividend over time.
The principal risk for the oil and gas giant is that global energy prices remain bearish. This has been a key reason behind its lacklustre share price.
However, I think China’s economy will strengthen over time, and it is the world’s largest importer of oil. I also think the transition to greener energy will take longer than many people think. Both these factors are long-term bullish for oil prices.
As it stands, Shell looks very undervalued to me on the key price-to-earnings ratio at 12.8. Its competitor group’s average is 15.6.
Another share buyback
In its recent results, Shell also announced another $3.5bbn share buyback, expected to be concluded by 30 January 2025. It is the 12th consecutive quarter in which it has announced $3bn or more in buybacks.
These are broadly supportive of share prices, but as a shareholder I would always prefer such money be used to boost dividends instead. The long-term cash boost from a higher yield can be far greater than from a temporary rise in share price.
This is even more so if the dividends from a stock are compounded. This involves the dividends paid being used to buy more of the stock that paid them.
A modest rise in dividends
That said, Shell’s dividends are set to rise somewhat from now to 2026. In 2023, it paid a total of $1.29, fixed at a sterling equivalent of £1.0232. This yields 4% on the current share price of £25.49.
Analysts forecast the payouts will increase to 108.7p this full year, 116.4p in 2025, and 122.6p in 2026. These would give respective yields on the present share price of 4.3%, 4.6%, and 4.8%.
Even at the current 4% with the dividends compounded, £10,000 would make £4,908 in dividends over 10 years. Over 30 years on the same basis, the payouts would rise to £23,135.
If the yield does rise to the forecast 4.8% in 2026, £10,000 invested would see £6,145 in dividends after 10 years and £32,086 after 30 years.
This disproportionate increase in dividends over time from even a small increase in yield underlines why I prefer firms to boost shareholder rewards through dividends, not buybacks.
Will I buy more of the shares?
I have bought Shell stock over several years at an average price much lower than now. So I am happy with that position.
If I did not have it, I would buy more today, given its long-term growth prospects. These should drive the share price and dividend higher over time.
The post As Shell’s share price continues to drift lower despite strong Q3 results, should I buy more? appeared first on The Motley Fool UK.
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Simon Watkins has positions in Shell Plc. 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.
