Stock market

Trading at all-time highs, is there any value left in Shell’s share price?

Image source: Olaf Kraak via Shell plc

Shell(LSE: SHEL ) shares are trading at all-time highs at over £29.

For some investors, such a rise may signal that they should jump on the bandwagon and buy the stock. For others, it may indicate that they should avoid shares because they are more expensive than ever.

In my opinion, neither response is correct, the only question worth asking is: Does the shell still have any value?

Has price gouging wiped out all value?

The company has risks, of course, as with all stocks. One is better balancing one’s energy transfer strategy. Heavy drilling for oil and gas prompts government pressure to ease up. In the current strong oil and gas market that could mean very little revenue.

Another risk is that these markets may see a sudden reversal due to the change in the current bullish supply and demand mix.

That said, on each of the key stock valuation measures that I think are most useful, Shell shares still look very undervalued.

On price-to-earnings (P/E) ratio, it currently trades at 13.1. This is the lowest in its peer group, with an average of 14.8. So, it looks undervalued on this measure.

The same applies to the price-to-book (P/B) ratio at which it trades at 1.3. It is again the lowest in its peer group, with an average of 2.9.

And it is also undervalued on price-to-sales (P/S) ratio. Its P/S is just 0.8 which is by far the lowest compared to the peer group average of 2.4.

A strong performing business

These low prices do not seem to me to be supported by the performance of the company either.

Its Q1 results, released on May 2, revealed adjusted revenue of $7.7bn. That was well ahead of consensus analysts’ forecast of $6.46bn and outpaced the previous quarter’s $7.3bn.

Its cash flow also increased from Q4 – up 6% to $13.3bn, providing a further engine for growth.

It reduced its net debt from $43.5 billion to $40.5 billion. But its debt ratio was still very low, with total shareholder equity of $188bn, compared to total debt of just $53bn.

All this meant it was able to increase its interim dividend to 34.4 cents (28p) per share from the previous 28.75 cents.

If we apply this 19.7% increase to the full 2023 payout of $1.2935, the 2024 dividend would be $1.5483. At the current share price of £29.43, this would yield 5.3%. It compares very favorably to the average. FTSE 100 Currently yielding 3.8%.

An additional reward for shareholders is a further share buyback of $3.5bn over the next three months. This supports the rise in share prices.

Should I buy the stock?

I already have a significant holding in Shell, bought at a much lower price now, so will stick with it.

If I didn’t have it, I would buy the stock today despite the high price.

My three key measures of stock value show that there is still a large undervaluation against its peers. I also think dividend payouts are moving back into very healthy territory, supported by strong business prospects.


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