Shares in Shell (LSE: RDSB) have easily outperformed the FTSE 100 since the turn of the year, with the oil major showing capital gains of 11%, while the FTSE 100 is up just 1% over the same time period. Indeed, this weeks news of a further asset disposal (a 155,000 acre shale gas project in Wyoming for 550 million) shows that the company is making encouraging progress with regards to its strategy of selling off non-core, less profitable assets. However, there could be more to come from Shell and it could even be worth 3127p per share. Heres why.
A New Strategy
As alluded to, Shell has shifted its strategy as it seeks to become more nimble, leaner and, ultimately, more profitable. As ever, its cash flow remains extremely strong and this allows the company to embark on an ambitious capital expenditure programme and share buyback programme. Together, these programmes should add value for Shells shareholders moving forward, as the companys asset base becomes more capable to deliver growth and its share price is supported by a programme that saw 3 billion of shares purchased for cancellation in 2013 alone.
However, when it comes to dividends per share, Shell could be a little more generous. Indeed, with the company aiming to offload up to $30 billion of assets, its dividend payout ratio seems to have scope to increase over the medium term. For example, Shell currently pays out 49% of profit as a dividend which, given its strong cash flow, seems a touch low. Were it to pay out 60% of profit as a dividend, it would equate to dividends per share of 137.6p. Assuming that Shell continues to trade on the same yield as at present (4.4%), this would equate to a share price of 3127p, which is 23% higher than the current share price.
Certainly, Shell is unlikely to increase its payout ratio overnight. However, with the companys strategy beginning to take shape and its cash flow remaining extremely strong, it has the potential to do so over the medium term. As a result, Shell could deliver impressive capital gains that are aided by an ambitious share buyback programme, as well as a yield of 4.4% that remains well above the FTSE 100 average of 3.2%.
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Peter Stephens owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.