Shell's New Dividend And Buyback Program, New Targets?

Key Points

• Shell shares are popping by nearly 3% in Wednesday's trading session as investors woke to satisfy news regarding new capital allocation policies benefitting them. 
• Being the cheaper name in the peer group, Shell's lowest valuation since 2008 has sparked momentum in share repurchases alongside a dividend payout bump. 
• Capital expenditures guidance will relate to these historical periods where Shell stock outperformed along with oil prices. 
• Analyst targets reflect some of the upsides that management is pointing towards; as investors face a double-digit ROI opportunity, macro tailwinds are also here to help.

Key Points

• Shell shares are popping by nearly 3% in Wednesday's trading session as investors woke to satisfy news regarding new capital allocation policies benefitting them. 
• Being the cheaper name in the peer group, Shell's lowest valuation since 2008 has sparked momentum in share repurchases alongside a dividend payout bump. 
• Capital expenditures guidance will relate to these historical periods where Shell stock outperformed along with oil prices. 
• Analyst targets reflect some of the upsides that management is pointing towards; as investors face a double-digit ROI opportunity, macro tailwinds are also here to help.

Shares of Shell (NYSE: SHEL) are rallying by as much as 2.6% in the pre-market hours of Wednesday morning as investors and traders pile in to anticipate further price reactions stemming from the company's latest announcements. As most of the attention throughout markets seems to be headed toward decrypting where oil prices will be headed, Shell's management has turned its focus into retaining investor interest via capital allocation programs.

With increments in the dividend payout and an even more generous share repurchase program, already cheap shares may be brewing a new potential ceiling. 

Shell stock has outperformed one of the biggest names in the industry, Chevron (NYSE: CVX), by as much as 11.2% during the past twelve months. Despite an outstanding outperformance, Shell is still trading well below the valuation multiples of the lackluster competitor, with a compressed price-to-book value and a price-to-earnings multiple.

Other names like BP (NYSE: BP) and Exxon Mobil (NYSE: XOM) have left Shell behind regarding price action, which only reiterates Shell's position as the cheaper option. By buying back cheap shares, management hints at the likelihood of this being the case.

Performance and Value Focus

During the latest investor press release, Shell pointed out some satisfying viewpoints and intentions moving forward for the rest of 2023. Heading the report by reiterating management's focus on performance and value creation, investors can understand the future of the stock's price action. Considering that Shell stock is still trading at one of its lowest price-to-earnings ratios since the financial crisis of 2008, the recent 180% rally since the lows of 2020 is only the beginning of a further normalization in the company's valuation. 

As confidence grows concerning the future of the business, management has adopted a few critical angles from which to deliver more value to shareholders. Starting with an increase in cash flow from operations (CFFO) distributions, investors will now receive 30-40% of total CFFO from 20-30%.

This increase implies an initial 15% bump in the dividend payout, followed by a targeted $5 billion share repurchase program, subject to board approval for the second half of 2023. A $5 billion buyback program would represent 2.5% of the company's market capitalization, nothing to scoff at.

These allocations are made possible by successful cost-reduction initiatives, as executives have derived a plan to reduce structural operating costs by as much as $3 billion by 2025. Capital expenditures have also been reduced to new guidance of $22 billion to $25 billion per year for 2024 and 2025, signaling a bullish future for the stock. Investors will spot a trend in capital expenditure levels and the subsequent stock performance by analyzing Shell's financials.

From 2013 to 2017, capital expenditures fell from $32 million to $20 million when oil prices and Shell stock declined significantly. Considering that today's guidance has yet to reflect pre-pandemic spending, management may hint at higher oil price expectations and a rallying stock.

Increased Speed-Limit Ahead

Just as capital expenditure guidance points to a historical trend of stock outperformance, the amount of capital that is to be allocated toward share buybacks also acts as a significant indicator of management expectations. Shell stock's price-to-book value ratio, currently selling for 1.0x, may help investors make sense of management's viewpoint. It has historically traded between 1.5x to 2.0x; today's multiple marks the lowest since the oil crisis in 2016 (ex., COVID-19 sell-offs). What is more important is how this multiple will drive the stock price moving forward.

By expecting increased CFFO and thus implementing capital allocation policies ahead of this realization, management is well aware that the company will be able to command a higher price-to-book value ratio and that the underlying book value itself is set to expand as CFFO and share buybacks feed into equity levels.

Shell's analyst ratings point to a near 15% upside from today's prices; considering today's dividend yield is reaching 4% and set to rise after these programs are implemented, investors have an opportunity that looks more like 20% ROI. 

As the global economic powers (namely the U.S. and China) focus on bringing their economies to more acceptable activity rates, oil demand is the constant in enabling these objectives. As global trade and shipping pick up, as vehicle orders and basic materials backlogs kickstart, oil - and Shell - will be very well positioned to ride the macro wave. Management knows this, analysts know this, and do investors?