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As a fully paid-up member of the awkward (contrarian) squad, this column would usually look askance at a share price chart that goes from bottom left to top right to reach a new record high (or as near as makes no odds).
However, even cussed Northerners are aware of the old market dictum about “run your winners, cut your losers”, and there seem to be plenty of good reasons to stick with Shell, especially for those investors who are seeking income.
Last week’s third-quarter results offered little beyond analysts’ consensus, at least in terms of profits, since the oil giant’s underlying earnings on a “current cost of supply” (CCS) basis, excluding the effect of changes in the value of held inventory, met analysts’ expectations almost to the dollar at $6.2bn (£5bn).
That represented a one-third drop from the equivalent three-month period last year, thanks to lower oil and gas prices and despite another strong performance from the trading arm.
But what really catches the eye is the strong cash flow. Shell is keeping capital expenditure on a tight rein and seeking to maximise returns from its existing hydrocarbon assets.
This will drive climate campaigners and ESG (environmental, social and governance) investors to despair, but those who prefer to focus on dollars and cents will nod with approval, for two reasons. First, American rivals such as ExxonMobil and Chevron are seeking to double down on oil and gas via big acquisitions. Second, Shell is returning a hefty chunk of its cash flow to shareholders.
After last week’s announcement of another rise in the dividend and a fourth share buy-back for the year, Shell is on course to return some £18bn to its investors, or about 10pc of its market value. Such a cash flow yield beats Bank Rate, 10-year gilt yields and inflation.
Admittedly, private investors do not tend to get a sniff of buy-backs, but there is still good news for readers here. Since 2018 Shell’s share count has fallen by a fifth, so all things being equal a private investor’s actual stake in the company – and share of its assets, cash flow and dividends – has risen accordingly.
Risks still abound. Natural gas prices are down by two thirds in a year and a recession could put oil into reverse too, crimping cash flow and shareholders’ returns. Penurious governments could impose further taxes.
But wars in Ukraine and the Middle East mean energy security is a major issue and the big oil and gas companies are among the leading providers of that security, especially as renewable alternatives such as offshore wind farms are having a bumpy time.
Limited investment in new exploration across the globe for the past eight or 10 years means hydrocarbon supply is not growing when demand is still on the rise, and that may provide a more fundamental support to commodity prices, exposure to which could still, alongside the dividend yield, offer some form of protection from inflation.
Questor will stick with Shell. Hold.
Questor says: hold
Ticker: SHEL
Share price at close: £26.74
Update: AG Barr
Shares in the soft drinks maker AG Barr have fallen by 110p or 17.8pc since our initial study in August 2019, although 41.8p a share in dividends provide a welcome lift. But the producer of the Scottish icon Irn-Bru has more going for it than the price action would imply and patient holders could yet reap their rewards.
September’s first-half results were solid, as pre-tax income rose by 7pc despite a decision by the company not to pass on all input cost rises to customers, and the board sanctioned a 6pc increase in the interim dividend, supported by a balance sheet that boasts net cash. AG Barr has also added to its product range. Last year it bought Boost and oat-milk specialist Moma and has now purchased tropical fruit drink brand Rio for £12.3m.
Group operating profits have not advanced since 2018, thanks to regulation on sugar content, the pandemic, carbon dioxide shortages and input cost inflation. This explains why the shares are broadly unchanged over the past decade, although the acquisitions, coupled with additional investment in brands and new products, provide a launchpad for future growth in sales, profits and dividends, if analysts’ forecasts are anything like a dependable guide.
A share price multiple of about 15 times forecast earnings and a yield of 3pc look decent value in the circumstances.
AG Barr could yet bring fizz to portfolios. Hold.
Questor says: hold
Ticker: BAG
Share price at close: 509p
Russ Mould is investment director at AJ Bell, the stockbroker
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