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Shell shares on back foot despite ‘shareholder bonanza'

Shell launched a US$25bn share buy-back programme, but, would investors rather have bigger dividends which they can re-invest themselves?
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Shell shares were down 80p or 2.94%

Royal Dutch Shell PLC (LON:RDSB) shares were on the back foot despite the unveiling of what analysts see as a “bonanza for shareholders”.

Shell this morning revealed it has decided to launch a US$25bn share buy-back programme.

READ: Shell downgraded by SocGen which now prefers BP

The programme, which will run through 2018 to 2020, will effectively reduce the oil major’s equity in issue by around 10%, and follows an extended period in which low crude prices meant dividends were paid in shares.

It kicks off with a maximum commitment to repurchase US$2bn of shares in the first three months.

Shell shares were down 109p or 4%, changing hands at 2,616p.

Share buyback is a boon for the share price

“Confirmation that the much anticipated $25 billion share buyback programme will start imminently is a boon for the share price, whilst the current yield of 5.3% is untroubled as Shell maintains its pledge to retain the dividend through thick and thin,” said Richard Hunter, analyst at Interactive Investors.

“These two drains on capital resources are more than offset by the company’s prodigious cash generation, whilst the divestment programme, reduction of debt and streamlining of its operations are all adding to the stock’s attractions.”

Would investors prefer bigger dividends?

Elsewhere, Accendo Markets analyst Mike van Dulken said: “As good as the news from Shell is, very strong Q2 profit growth (on a CCS basis: current cost of supplies), thanks to higher oil prices, still missed expectations (trying to soften the blow?).

“Guidance also suggested lower gas and upstream production and flat oil product sales. And the dividend was left unchanged.

“The latter wouldn’t normally be a biggie, but the negative share price reaction suggests shareholders asking why some of this monster return over the next two years isn’t being allocated to dividends that they could actually spend (or reinvest), rather than the company taking the decision for them, merely reducing the number of shares in circulation, thereby flattering the Earnings per share (EPS) metric.”

Financial results

It comes as Shell reported the current cost of Supply (CCS) earnings attributable to shareholders – its preferred metric for the bottom line - had increased during the second quarter. The figure, excluding certain items, amounted to US$4.69bn up 30% from the US$3.6bn seen in the first quarter.

Income attributable to shareholders was reported at US$6.02bn, up 290% from US$1.54bn in the first quarter and also marks an improvement year-on-year compared with the US$5.89bn generated in the same quarter of 2018.

All together for the first half, CCS earnings excluding identified items came in at US$10.33bn, versus US$7.57bn in the first six months of last year, meanwhile, income attributable to shareholders more than doubled to US$11.92bn compared with US$5.08bn.

Free cash flow was reported at a healthy US$14.7bn for the first six months of 2018, albeit it was lower than last year’s first half in which it saw US$17.34bn.

Shell maintained its second-quarter dividend at 47 cents per share, similarly, the total payout for the first half stayed at 94 cents. The oil major highlighted that it is paying a total of US$3.9bn of dividends for the quarter.

Ben van Beurden added: “Our financial framework remains unchanged.

“Our free cash flow outlook and the progress we have made to strengthen our balance sheet give us the confidence to start our share buyback programme.”

--Updates for share price--

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