Today, Shell (LSE:SHEL) released its Q2 earnings. Shell shares are down a modest 1% on the news, given some of the negative numbers that were put out. However, over a one-year period, the stock is up 14%. When I take a step back from the commotion of today, I think that investors could find that the stock is still a very attractive purchase.
Take results with a pinch of salt
The results out showed that adjusted earnings dropped by 47% versus the same period last year. The $5.1bn in earnings was hit by several divisions. For example, when comparing the figure to the Q1 results, divisions such as integrated gas, chemicals, and upstream all contributed at least $1bn less in Q2.
Shell flagged up a lower commodity price environment as one reason why it struggled to match historical performance. This is one of the main risks I see going forward that could hamper the company.
However, I think we need to look at the broader picture here. The results that we are comparing it to (particularly H1 last year) were simply exceptional. This was a period where the disruption from the Russia/Ukraine conflict saw large price movements in oil and gas markets. Therefore, it was always going to be hard to match that level of profitability.
At $5.1bn, it’s still a very strong level of profits for a three-month period for a FTSE 100 constituent.
Good news for income hunters
Another point worth flagging from the results was a commitment to increase the dividend payments by 15%. At the moment, the Shell dividend yield is 3.73%. If we factor in the impending jump, it pushes the yield up to around 4.27%.
The FTSE 100 average yield is 3.61%, so this is above average. Some might want to seek yet higher yielding options, and I do understand this argument. Shell might get overlooked for other mining stocks with yields above 5%.
However, I’d say not to be so hasty. Shell clearly is swimming in excess cash flow at the moment. Capex is high, which is great for future-proofing the business. Yet for the rest of the money, I’d expect dividend payments and share buybacks to continue to increase in the coming year.
This is good news for income investors. Aside from just the dividend payments, further share price gains could help to push the overall return even higher.
Time to go bargain shopping
To seal the deal, I believe the stock is a bargain when looking at the price-to-earnings ratio. This metric helps investors to compare stocks on a more level playing field. A figure below 10 is generally considered to be undervalued.
At present, the Shell ratio is 7.76. Although nothing is guaranteed, this ratio in the long term could move back towards 10 or slightly higher. For this to happen, if earnings stay the same then the share price would need to rally.
Everything considered, I believe investors should consider adding Shell shares to their portfolio.
