What to make of Shell’s latest dividend hike of 15%?

Shareholders of energy giant Shell (LON: SHEL) – who have had to contend with dividend yields in the range of 4% in recent quarters – are about to be greeted with some welcome news. That’s because the energy giant’s CEO Wael Sawan has signalled a strategic shift in a bid to improve investor confidence.

Announcing a new financial framework at its capital markets day on Wednesday (June 14, 2023), Sawan said Shell would increase its dividend by 15%, increase overall shareholder distribution of operational cash flow to a 30% – 40% rate (versus the previous 20% – 30% rate), as well as reduce capital spending to $22-25 billion per year for 2024 and 2025.

The energy giant will also lift the rate of its share buyback programme in H2 2023 to “at least” $5 billion, up from $4 billion in recent quarters.

What does the shift imply in terms of dividends?

On May 4, 2023, Shell declared its Q1 2023 interim dividend to be US$0.2875 per ordinary share, with euro and pound sterling equivalent payments coming in at €0.2678 and £0.2299 per ordinary share, respectively. Following Wednesday’s announcement, shareholders can now look out for payouts in the region of ~US$0.33 per ordinary share.

Additionally, the uptick in the share buyback rate will likely be near-term price positive. While that’s welcome news, it must be noted that despite the announced increase, Shell’s dividend payout will still be ~30% lower than what it was pre-COVID in US dollar-terms.

Of course, Shell’s payout cuts announced by former CEO Ben van Beurden in May 2020 will take some time to be reversed. But what investors may take comfort from is Sawan’s desire to gradually build the dividend payout back, and bring about a wider change in corporate direction.

Not quite ditching net zero ambitions

In recent months, eyebrows have been raised as Shell, under Sawan’s stewardship, ditched multiple low carbon projects including biofuels, hydrogen and offshore wind due to weak earnings forecasts and medium-term return on investment projections. The company also dumped its European home retail power business, once touted by van Beurden as a key energy transition foray.

So, is Shell’s pledge of net zero emissions by 2050 dead in the water? Not quite, if Sawan is to be believed. According to the Shell boss, the energy giant will now focus on “performance, discipline and simplification” to achieve that objective.

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The company’s suitably named “Powering Progress” strategy is in motion, and Sawan noted: “We are investing to provide the secure energy customers need today and for a long time to come, while transforming Shell to win in a low-carbon future. Performance, discipline, and simplification will be our guiding principles as we allocate capital to enhance shareholder distributions, while enabling the energy transition.”

Back to ‘crude’ basics

The market is likely to get the impression that Shell is getting back to basics and not diluting focus on its core source of income – hydrocarbons, and for good reason. To this effect, Shell announced it would grow its Integrated Gas business and as well as its market leading liquefied natural gas (LNG) market, stabilize oil production to 2030, and extend core upstream operations.

That means it would no longer target oil production cuts of 1% to 2% annually, announced in 2021, as it claims to have reached its target sooner than anticipated. But it will also “optimize” the value from investments it has made in downstream and renewables energy solutions, while marketing and offering low-carbon fuels and electric vehicle (EV) charging across global transportation and industrial value chains for its customers.

Investments in hydrogen and carbon capture and storage (CCS) will now be in a “disciplined manner” while investment in power will be selectively focused on markets where Shell’s trading activities can deliver higher headline returns, while not losing sight of low-carbon energy technologies.

Finally, Shell’s Energy and Chemicals Parks will also be repurposed, assets in Singapore will be subject to a strategic review and high-grading of European assets will be stepped up. Altogether, the energy giant will invest US$10-15 billion in 2023-25 towards low-carbon energy options such as biofuels, CCS, EV charging and hydrogen.

Shell also reiterated is ambition of achieving “near” zero methane emissions by 2030 and eliminating routine flaring from upstream operations by 2025.

But overall, with reduced capital spending, and structural operating cost reductions of at least $2 billion by end-2025, it seems Shell wants to spend less, deliver more value and lower emissions whilst keeping investors onboard. That’s a tough act and remains to be seen how it all pans out.