Royal Dutch Shell
stock climbed on Thursday, as the oil major surprised investors with a dividend hike after beating expectations in the third quarter.
The Anglo-Dutch oil major returned to profit in the three months to Sept. 30 after a record $18.1 billion loss in the second quarter, reporting income attributable to shareholders of $489 million. That may have beaten analysts’ expectations but it represents a 92% plunge from the previous year’s $5.9 billion, as oil and gas prices remained lower and demand weak.
Oil prices slumped on Wednesday as the American Petroleum Institute reported a larger than expected rise in supplies of U.S. crude inventories, suggesting the Covid-19 pandemic continues to dampen demand.
But Shell’s surprise profit beat, led by its marketing business which includes petrol stations and convenience stores, wasn’t the only positive for investors as it unveiled a new plan to increase its dividend.
Shell slashed its dividend in April—from $0.47 per share to $0.16—for the first time since World War II, as coronavirus lockdowns caused a global collapse in oil demand.
After a stronger-than-expected third quarter, the company said it has decided to increase its dividend by around 4% to 16.65 U.S. cents.
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That may be a small increase but, perhaps more important, its chairman Chad Holliday said the board was “confident that Shell can sustainably grow its shareholder distributions” alongside investing in growth.
The “progressive dividend policy,” proposed share buybacks, and the third-quarter performance buoyed investors, as shares rose more than to 2% in early London trading. The company also set out plans to cut debt from $73.5 billion to $65 billion, and once that target is achieved, distribute 20-30% of cash flow from operations to shareholders. Shell will also free up cash for its green energy ambitions, it added.
The second quarter of 2020 brought record losses for some of the world’s largest oil-and-gas companies as the coronavirus pandemic decimated demand. Shell reported an $18.1 billion second-quarter loss as it lowered long-term oil price forecasts, reflecting weaker energy demand.
posted a $16.8 billion loss, also cutting its dividend for the first time in a decade, before likewise returning to profit in third-quarter earnings reported earlier this week.
The industry’s plight has also served to accelerate its shift toward green energy, with BP, Shell, and
all ramping up strategies to become net zero carbon by 2050. Shell announced plans in September to cut up to 9,000 jobs as part of a major restructuring plan, as it laid out ambitions to become a net zero emissions energy business.
Read:Shell Is Said to Be Making Big Changes as It Gets More Green
Looking ahead. Demand remains weak but Royal Dutch Shell’s third-quarter update provides some optimism for investors. Hargreaves Lansdown pointed to the demand slump and said the company needed to sell off assets to increase dividends further and invest in renewables. “Shell has a lot on its plate and its plans are ambitious. If it can transform itself in the way it suggests, then shareholders can look forward to steady income growth from a stock that yields over 5%,” said Hargreaves Lansdown select fund manager Steven Clayton.
That is a fairly big ‘if’ at this stage, and oil prices and demand are likely to remain low for now. The race to be at the forefront of the green energy revolution is gathering pace and will be extremely competitive, but Shell looks to have a plan.