Shell Missed Earnings Expectations, Capping a Brutal Year. But a Dividend Hike is Ahead.

The back story. The Covid-19 pandemic and global lockdowns dried up demand for crude, causing prices to collapse and losses to mount for oil-and-gas companies. Shell was hit hard: the group cut its dividend in April 2020 for the first time since the World War II, has written down more than $21 billion in assets in the last year, and seen its share price decline around 45% since the beginning of 2020.

But the group returned to profitability in the third quarter of the year, hiking its dividend, and analysts have been positive about the stock because of the company’s strong cash flow.

Covid-19 and the crude price crash came as oil-and-gas companies were already facing uncertainty over the future of energy. Rival BP said in its annual report for 2020 that peak oil may have already passed, and the industry has been pushed to diversify against the backdrop of an energy transition.

Shell plans to become carbon neutral by 2050, and in late January announced that it had agreed to buy electric-vehicle charging company Ubitricity—an expansion into a fast-growing industry.

Read more:Royal Dutch Shell to Buy EV Charging Company Ubitricity in Green Energy Push

What’s new. The oil major posted fourth-quarter earnings that broadly missed analyst expectations on Thursday. Income attributable to shareholders adjusted for cost of supplies—Shell’s preferred earnings metric, closely watched by analysts—fell 87% in the final three months of 2020 compared with 2019, from $2.9 billion to $393 million, and also down from $955 million in the third quarter. The analyst consensus was for around $540 million.

This brought full-year earnings to $4.8 billion, a 71% drop from $16.5 billion in 2019. The annual loss attributable to shareholders was $21.7 billion.

Cash flow from operations of $6.3 billion in the fourth quarter was a standout positive result, beating expectations, but down 39% from $10.3 billion in the final period of 2019.

The strong cash flow helped bolster the balance sheet and pave the way for a quarterly dividend of 16.65 cents, the same as in the third quarter. Shell said it planned to hike the dividend to 17.35 cents in the first quarter of 2021.

“We are coming out of 2020 with a stronger balance sheet, ready to accelerate our strategy and make the future of energy,” said Ben van Beurden, the group’s chief executive. “We are committed to our progressive dividend policy.”

Also read:Shell’s Cash Flow Story Is ‘Too Good to Ignore.’ It’s Time to Buy the Stock, Says Bernstein.

Looking ahead. Shell’s earnings were bad—this was bound to be the case. But investors should brush off the fact that results were even worse than expected and look to the future. Next week the group will have a strategy day, which will include more details on what must be an ambitious plan to diversify away from fossil fuels.

Investors should keep the faith, because there is still reason to be bullish on the stock. Shell sees the writing on the wall about the future of energy and has the cash flow momentum to potentially pull off a major strategic shift. That could make it one of the better-positioned major oil companies.

The dividend hike is also welcome news for shareholders. But it requires thought. Analyst Russ Mould at AJ Bell wrote that “shareholders must now decide whether that promised payment, which would represent a 4% increase on the fourth quarter and an 8% hike on the first quarter of a year ago, will bring welcome succor or leave them exposed to a value trap that could make them feel like suckers.”