The Unpopular 5.38% Dividend Yield About To Buy Back ~8% Of Shares Outstanding

Summary

• Royal Dutch Shell is very much out of favor.
• Students increasingly don't want to work there.
• The CEO has to answer for his occupation.
• Meanwhile management is intent on generating a world class total shareholder return.
• The financial case is hard to dismiss.

Today the Dutch financial paper, FD for short, ran a cover story how students at a prominent technical university (Delft) no longer view Shell (RDS.A) (RDS.B) as a premier destination. This same day the FD also ran an excellent daily column dissecting potential investments under the pseudonym Bartjens. Today it casts doubt on Shell's ability to carry out its $25 billion buyback program. That's just one day of financial media coverage (which is the least hostile kind).

The energy giant has an image problem and according to an annual Universum poll Shell is now only 7th on the list of preferred employers. CEO Ben van Beurden admits to having to answer for his career choice at barbecues, birthday parties and at the breakfast table. I'll presume that means his children are questioning his occupation after having worked there since the early 80's. Tesla (TSLA) happens to take the #1 spot in the Universum poll. Here's the graphic they ran:

I view this as a soft contra-indicator

Five years from now Shell will still be a top 10 employer but Tesla will be gone. Total shareholder returns will mimic that pattern. Excellent for Shell and terrible for Tesla.

Let's get to some factual stuff. On its recent earnings call the CFO said:

We delivered $5.1 billion of organic free cash flow this quarter and $15 billion on a four-quarter rolling basis at an average oil price of $57 per barrel. As you know, we expect to generate some $25 billion to $30 billion organic free cash flow around the end of the decade at $60 per barrel in 2016 real terms. Organic free cash flow generation over the last four quarters is consistent with this outlook. And we expect close to $10 billion in additional free cash flow from new projects between 2018 and 2020. In average prices, around $65 per barrel would add some $5 billion to the four-quarter rolling free cash flow based on our oil price sensitivity rule of thumb.

At around $57 per barrel the company generated $15 billion of free cash flow over the past four quarters.

It is expecting to generate $25-$30 billion end of 2019 if oil holds up around $60.

That's before any acquisitions which I'm guessing could add between $1-$4 billion in free cash flow by that time.

If oil is $65 instead you can add another $5 billion.

But Brent isn't at $60 or even $65. It is at $74.54.

Brent Crude Oil Spot Price data by YCharts

If oil doesn't go up or down you are looking at Shell going from ~$15 billion in free cash flow trailing-twelve-months to ~$40 billion in free-cash-flow by end of 2019. The company could reasonably generate $60 billion in free cash flow before the end of 2019.

Management promises $25 billion worth of buybacks between now and 2020:

As I said, we remain committed to the $25 billion and we're looking to deliver that between 2018 to 2020. We want to deliver a world class investment case. We want to be number one in terms of total shareholder return. We understand that we need to increase shareholder distributions to deliver on that world class investment case. That's a clear part of our financial framework. It's a clear part of our world class investment case. And that's why I keep going back to this cascade of priorities and what we believe it'll take to move to the share buyback program, a good macro environment, strong underlying performance, delivery on the divestment program, all of which should create the conditions for us to commence the share buyback program.

Shell pays a 5% dividend which makes the buyback ambitious in a good way. The faster it buys back shares the less money the commitment will set them back. Given the firm still plans to do some minor divestments and promised to keep CapEx spending low it basically got both covered. Finally, it also needs to roll over debt. That should be easily doable, while still improving debt ratios, with operating cash flow growing so much. In case there are any hiccups there's still $21 billion in cash.

Shell will be attempting to plow $25 billion back into its own stock (not insignificant on a $291 billion market cap), pay you a 5%+ dividend while doing so while slowly growing its business. This is making it very hard from a financial standpoint to ignore Shell.

RDS.A EBITDA (TTM) data by YCharts

With students running the other way and CEO's of public companies having to answer for their evil career choices it's not an investment that's going to make you popular. However, you are very unlikely to go broke (or be out of a job) for owning Shell. I'm not so sure about Tesla with a debt load equaling its revenue.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RDS.A over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.