Should I buy Shell shares after last week’s results?

On Thursday last week, shellShares ‘s (LSE:SHEL) about 15% of the total value of trade in London Stock Exchange. This surge in activity coincides with the release of the company’s results for 2022.

It goes without saying that the reaction to the oil and gas giant’s massive $39.9bn profit is scathing. To parody Jane Austen: it’s a universally recognized truth that energy companies with good fortunes always want excellent PR teams.

Paul Nowak, general secretary of the Trades Union Congress, described the gains as “obscene“. Others accused the company of profiting from the war in Ukraine. And opposition MPs are leading calls to increase the windfall tax. Meanwhile, three Greenpeace campaigners managed to board an oil platform in the North Sea, carrying a flag with the slogan: “Stop Drilling. Start Paying“.

But perhaps the most surprising reaction came from investors. Shares in the company closed down 1%, on the day when the most FTSE 100 shares enjoyed outstanding results.

future expectations

In theory, a company’s stock price represents a discount to future cash flows – an estimate of fair value.

Over the past 12 months, Shell’s share price has risen by more than 20%. But despite the bumper profit, it is only 9% higher than five years ago.

This may reflect the view that earnings will remain high – but not high – for the foreseeable future. I think this is understandable given the fall in oil and gas prices over the past few months.

Lots of cash

When looking at potential investments, I understand that profits can be affected by esoteric accounting entries. A better performance measure is cash flow from operations (CFFO). In 2022, Shell’s CFFO will be $68.4bn, which is roughly equivalent to Croatia’s Gross Domestic Product.

The company has plenty of cash reserves, so the directors announced a 15% increase in the dividend for the last quarter of 2022. This brings the total payout for the year to $1.04. At current exchange rates, this represents a yield of 3.6% – below the FTSE 100 average of around 4%.

In my opinion, the shareholders could have been better rewarded if the directors had decided not to implement a share buyback policy. During 2022, the company is spending £11.4bn to buy back its own shares. Based on the issued share capital at the end of 2021, Shell shareholders could have received an additional £1.47 in dividends last year. If the board had done this, the results would now be a whopping 10%!

The management team likes to buy back shares because they increase earnings per share, a key metric that rewards them. But I don’t really like it. And because of the way Shell chooses to reward its shareholders, I will not invest in the company.

Another option

There are plenty of other FTSE 100 stocks currently offering better returns.

For example, the shares of these four companies all returned more than 8% – M&G (9.9%), Vodafone (8.3%), The Phoenix Group (8.1%) and Aviva (8.1%).

For me, when choosing stocks, income is as important as capital growth. To quote Jane Austen directly: “Big income is the best recipe for happiness I’ve ever heard”.