Royal Dutch Shell confirms massive share buyback

by from interactive investor |

It was only a matter of time, but Shell has finally put plans in place to buy back a huge slug of its own shares. Richard Hunter, head of markets at interactive investor, has the detail and results analysis.

The old market adage of "Never sell Shell" is holding firm as the company has unveiled something of a bonanza for shareholders.

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.

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.

Revenue and operating profits for the period both jumped by over 30% during the second quarter, underpinned by a higher oil price, whilst the apparently seamless integration of BG has enabled the company to move on to the next phase.

Source: interactive investor      Past performance is not a guide to future performance

Divestments are not entirely without cost and are likely to contribute to lower gas production in the medium term, exacerbated by higher maintenance costs.

Meanwhile, the company's cash pile is being worked hard, with cash flow dropping 16% over the period and with capital investment suffering slightly as a result. This will need to be addressed in due course as the transition to a company which wishes to remain relevant as the power landscape changes over the next decades will also be challenging.

Nonetheless, on the whole this an impressive update which should serve to confirm the Shell's image as a core portfolio constituent.

The share price has also been on a tear, having risen 28% over the last year, during which time the wider FTSE 100 added 3%. Despite a slightly muted reaction in early trade given broader market weakness, the general view of the shares as a 'strong buy' is most likely to remain intact.

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