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It may be tragic but Shell (LSE: SHEL) shares spiked when Donald Trump bombed Iran and the oil price surged towards $78 a barrel. With crude now back near $68, the heat’s gone out of the stock. It’s down 8% over the last 12 months. But long-term investors won’t be too bothered. Over five years it’s still doubled, with dividends on top.
It also looks relatively cheap, with a price-to-earnings ratio of 9.85. That’s comfortably below the long-run FTSE 100 average of around 15. A bargain? That depends on what happens next.
Earnings bounce back
On 2 May, Shell posted a 28% drop in first-quarter net profit to $5.58bn, amid falling oil prices and lower refining margins. However, it did hold the pace of its share buyback programme, something FTSE 100 rival BP hasn’t managed.
Adjusted earnings, its definition of net profit, jumped 51% to $5.6bn, beating forecasts of $4.96bn. That was down from $7.73bn a year ago.
Adjusted earnings jumped to $5.6bn, up 51% on the previous quarter. Reported income hit $4.8bn, up from $900m. That’s an impressive recovery given oil prices were lower than in late 2024, averaging $76 a barrel. They’re lower today though.
Net debt ticked up to $41.5bn, but gearing remains reasonable at around 19%.
Dividend slowly rising
Before the pandemic, Shell paid out 188 cents per share in dividends. That was slashed by 65% in 2020 and has been recovering since. In 2024, it paid 139 cents, up 7.46% year-on-year, but still short of its pre-Covid high.
Today’s trailing dividend yield’s 4.11%. That’s lower than it used to be but backed by share buybacks too, with the group committed to returning 40-50% of operating cash flow to shareholders. Shell says it can support payouts even if oil falls to $40, and keep buying back shares at $50. That’s a decent cushion.
I’d always prefer to see cash hit my account, but buybacks do support the share price over time.
Risks to weigh up
There are risks. A structural dip in oil demand could hit future earnings, as the world shifts towards electric vehicles and cleaner energy. China’s economic slowdown also casts a shadow over global demand.
On 26 June, Shell publicly denied it was planning a bid for BP, after media reports claimed talks were under way. I think that’s good for Shell, as this avoids trying to bolt on BP with all its issues.
Analysts reckon that Shell shares could rise 15% over the next year, with a median 12-month target of 3,028p (up from 2,625p today). The total return rises to almost 20% when factoring in the dividend. If that plays out, a £10,000 investment could return roughly £12,000. But as always, forecasts can misfire.
The FTSE 100 energy giant has long been a buy-and-hold stock, and that hasn’t changed. With the shares trading at under 10 times earnings and a solid income stream, I think long-term investors might consider buying today. Just don’t expect fireworks unless oil gets back above $80. Maybe it never will. Nobody knows.
This story originally appeared on Motley Fool
