Anything other than extraordinary profits from Shell would have been a surprise. It has ridden the wave of soaring oil and gas prices that have been unleashed by the war in Ukraine and profits last year doubled to almost $40 billion, smashing through a previous record of $28.4 billion set in 2008. It was an easy market debut for Wael Sawan, the company’s new boss.
Another bump in the fourth-quarter dividend of 15 per cent has taken the total payment to shareholders this year to 103.75 cents a share, a dividend yield of 3.6 per cent at the present share price. A fresh $4 billion share buyback programme also has been unveiled.
How long will bumper returns continue? For a little while yet.
A reliance on prices means earnings for energy majors such as Shell can be inherently volatile. Global recessions add to investors’ caution. That is reflected in an enterprise value of only 3.3 times forecast earnings before interest, taxes and other charges, below Shell’s long-running average. Yet tight supply and the return of demand from China have buoyed oil price forecasts for this year. Rocketing commodities prices handed Shell’s oil and gas production business an extra $8.8 billion in earnings last year and high prices are not expected to be confined to the past 12 months. Analysts have forecast $88.60 a barrel this year for Brent crude and $81.90 next year, lower than the average in 2022 but still a way above the price managed over the past decade. The same can be said for natural gas.
The group has a target to return at least 20 per cent to 30 per cent of the cash generated by the businesses back to shareholders through both dividends and extra buybacks. The proportion set to be handed back for last year stands at 35 per cent. Even if that percentage shrinks slightly, a cashflow forecast of $60.4 billion for this year, substantially higher than what had become the norm in recent times, still puts investors in line for meaty returns. The ordinary dividend suggested by analysts for this year is 125 cents a share, which would yield 4.4 per cent.
What about the windfall tax? Levy payments barely touched the sides last year. The total UK tax bill amounted to $134 million and is expected to rise to at least $500 million this year after the levy. That sum looks paltry in the context of the cash that analysts expect Shell to generate. Naturally, a tougher approach by the UK government could make the levy more of an issue for the group.
Like other energy majors, Shell is not being tempted into splurging on dealmaking and big exploration projects, as the industry came to regret during the last commodities boom. Capital expenditure is set to be between $23 billion and $27 billion this year, split roughly equally between investing in its oil and gas operations; its tilt towards less polluting activities such as liquefied natural gas; and “growth” areas that include electric vehicle charging points and biofuels. Notably, that budget includes any outlay for acquisitions.
There is no formal debt target, but leverage has already been substantially reduced over the past three years. At $44.8 billion, net debt is more than 40 per cent lower than it was at the end of 2019, which eases one drain on cash generated by the business.
All the risks associated with oil and gas majors such as Shell remain. That includes how it balances a gradual decline in oil production — which is expected to fall by about 1 per cent to 2 per cent annually — with funding investment in its energy transition strategy. For now, though, shareholders can expect generous cash returns to continue.
ADVICE Hold
WHY Shares offer a generous dividend, with the chance of more share buybacks
Renishaw
Bid speculation is normally a surefire way of reviving a flagging share price, but not in the case of Renishaw. Then again, talk of a sale has gone stale since its founders — Sir David McMurtry, the executive chairman, and John Deer, the non-executive deputy chairman — formally disbanded the process in July 2021. There is no update, save for the group “assessing all options”.
The FTSE 250 engineer still looks like a prime candidate for a trade or private equity buyer looking to the British market for value. The shares trade at 20 times forward earnings, which might not seem cheap on the surface. However, that is below a ten-year average of multiple of 26 and at about post-Brexit referendum levels. It has net cash of more than £200 million, which holds even greater appeal in an era of rising interest rates. And the kit the group supplies is vital for manufacturers to comply with regulatory standards, which generates customer loyalty and, therefore, pricing power.
The group makes micro-instruments used in industries ranging from plastic surgery to phones to aerospace. A return to building headcount and wage increases caused adjusted pre-tax profits to fall by 13 per cent over the first half of its financial year, a trend that is due to extend to the full year but was well flagged.
A darker wider economic outlook naturally attaches a higher risk to sales. The equipment that Renishaw produces typically is used in machines funded out of capital expenditure budgets, which are more likely to be cut if consumer demand worsens.
Electronics accounts for roughly a quarter of sales, but those making consumer products account for a much smaller proportion within the mix. Slowing demand from the computer chip and electronics industries over the first half of the year was more a result of running down stocks accumulated when supply chains snarled up, and just how much of that weakness is a consequence of manufacturers reducing elevated inventories and what is a byproduct of a macroeconomic downturn will become clearer in the coming months. It hasn’t halted sales growth yet.
ADVICE Buy
WHY Re-emergence of bid interest could lift the shares
