Higher Prices? Higher Rewards for Shareholders

Some companies assume that when things are going well, that trend will continue forever. That can sometimes lead to unpleasant surprises. During last year’s pandemic, a number of companies cut or suspended dividends or share buybacks, for instance.

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  • However, companies in the commodity space tend to recognize the power of cycles. When things are going well, they may be more inclined to pass the good times on to shareholders rather than overinvest when times are good.

    Case in point? Royal Dutch Shell (RDS-A). The Anglo-Dutch energy giant sees higher oil prices boosting its bottom line. But rather than spend that increased revenue on more exploration, the company has already used the higher revenue to reduce its debt. And the firm is looking to increase shareholder value via buybacks or dividends.

    Shares already yield 3.3 percent at current prices, and with shares down nearly 10 percent from their highs of 2021, and trading at 10 times forward earnings, there’s some potential value in a buyback.

    Action to take: Investors may like shares here, as the dividend could be boosted even further and stay there should oil prices remain high for some time to come. While not the highest dividend yield in the space, a growing dividend tends to boost a share price as well.

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  • For traders expecting a move higher on more buybacks, a call option looks valuable here. The October $45 call, last trading for about $0.80, has potential for mid-to-high double-digit profits depending on how quickly shares move higher in the coming weeks.


    Disclosure: The author of this article has no position in the company mentioned here, but may make a trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.