Shell beats profit forecasts a year after slashing the dividend

Debt reduction remains core, but a progressive dividend policy is being pursued again. Buy, sell or hold?

First-quarter results to 31 March

• Net income up 13% year-over-year to $3.23 billion (£2.33 billion)
• Group net debt down 4.2% year-over-year to $71.3 billion
• Dividend payment up 4% from the previous quarter to 17.35 US cents per share

Fortunately for investors, these latest results came without the drama seen this time last year when Shell (LSE:RDSB) cut its dividend for the first time since the Second World War. 

Extreme winter weather hitting its US Texas operations has dragged on adjusted earnings, although, as with rivals, an upturn in energy prices has aided profit generation. Overall adjusted earnings of $3.23 billion have just about beaten expectations of closer to $3.1 billion. 

Sales volumes under the ongoing global pandemic are down from the previous fourth quarter, although in line with the management’s recent guidance. Reduced operating expenses have been aided by lower maintenance costs and reduced marketing spend. 

In all, lower profit margins in the low-carbon power and renewable energy sectors have made reducing the cost base vital over the past year, as Shell looks to compete with both existing players and other oil majors moving in a similar low carbon direction. The reduction of elevated debt continues to require management attention and for now, stands at a level too high to yet commence share buy backs. 

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But Shell’s strength in lower carbon liquefied natural gas, given its previous acquisition of BG Group, should not be forgotten. Last year’s decision to rebase the dividend is now freeing up cash to help tackle debt, with share buybacks potentially on the horizon. A progressive dividend policy is now being pursued, while a historic dividend yield of over 3.5% is still not derisory in a world of ultra-low interest rates.

In all, and with analysts estimating a fair value price of over £17, market consensus opinion is highly favourable in tone, pointing towards a ‘strong buy.’