Morning Note: Market news and results from Shell and Becton Dickinson.

Market News

Asian stocks climbed to the highest level in more than a month – Nikkei 225 (+1.0%); Hang Seng (+1.8%) – and US equity-index futures advanced this morning after China said it is evaluating trade talks with the US, boosting optimism that tariff tensions will tamp down. Today’s US non-farm labour report may show employers added 138,000 jobs in April.

Treasuries fell (10-year yield is 4.22%) after Japan said the country’s holdings of US bonds are a negotiation card in trade talks with Washington. “Whether or not we use that card is a different decision,” Finance Minister Katsunobu Kato said. Gold rallied off its low and currently trades at $3,260 an ounce.

The Nasdaq was driven higher by Microsoft and Meta Platforms in response to good results. However, after hours, both Apple (-4%) and Amazon (-3%) fell following earnings reports. Apple sees $900m in higher costs from tariffs this quarter, while Amazon warned it’s bracing for a tougher business climate.

President Trump is asking Congress for a 23% domestic spending cut and a record $1.01 trillion in funding for national security in the 2026 budget. He is proposing steep cuts to domestic agencies, foreign aid, and diversity programmes, while prioritising the Golden Dome missile defence project, shipbuilding, and nuclear modernisation and border security.

Nigel Farage’s Reform UK won a key parliamentary by-election following a recount, in a blow to Keir Starmer. The FTSE 100 is currently 0.8% higher at 8,558. Sterling trades at $1.3310 and €1.1740.

Brent crude oil futures extended their recent gains toward $63 per barrel, supported by optimism over a possible easing of tensions between the US and China, the world’s two largest oil consumers. Shell posted better than expected results (see below).

Source: Bloomberg

Company News

Shell has today released first-quarter results which were better than market expectations. The group has raised its dividend by 4% and announced another $3.5bn buyback. In response, the shares have been marked up by 3% in early trading, helped in part by a bounce in the oil price.

Shell is a global integrated energy company with expertise in the exploration, production, refining, and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. The group is also allocating capital to low and zero carbon products and services including wind, solar, advanced biofuels, EV charging, hydrogen, and carbon capture & storage. According to Brand Finance Global 500, Shell is the most valuable brand in the industry, valued at around $50bn.

The business is divided into five segments:

• Upstream (i.e. E&P) explores for and extracts crude oil, natural gas and natural gas liquids. Shell has best-in-class deepwater assets complemented by resilient conventional assets in the Gulf of Mexico, Brazil, Nigeria, UK, Kazakhstan, Oman, Brunei, and Malaysia.

• Integrated Gas includes liquefied natural gas (LNG), conversion of natural gas into gas-to-liquids (GTL) fuels, and other products. Shell is the global leader in LNG (achieved through the 2016 acquisition of BG), a critical fuel for the energy transition, with a business that spans upstream, liquefaction, shipping, marketing, optimising, and trading.

• Chemicals & Products is made up of a focused set of assets – there are currently five energy and chemicals parks (i.e. integrated refining and chemicals sites) and seven chemicals-only sites.

• Marketing includes mobility, lubricants, and decarbonisation. In addition to the service stations with their EV charging footprint, Shell is the global number one lubricants supplier and operator of assets is renewable natural gas, sugar cane ethanol, and biofuels.

• Renewables & Energy Solutions includes Shell’s production and marketing of hydrogen, integrated power activities (solar and wind), carbon capture & storage, and nature-based projects. The assets are helping to reduce the carbon intensity of the group’s hydrocarbon product sites. The group is however stepping back from new offshore wind investments and is splitting its power division following an extensive review of the business.

In March, the group hosted an Investor Day at which it set out several operational and financial targets including:

• an increase in the structural cost reduction target from $2bn-$3bn by the end of 2025 (already achieved) to a cumulative $5bn-$7bn by the end of 2028, compared to 2022.

• Invest for growth while maintaining capital discipline, with capital expenditure lowered to $20bn-$22bn p.a. for 2025-2028.

• Grow free cash flow per share by more than 10% per year through to 2030 and generate a return of more than 10% across all business segments.

• Enhance shareholder distributions from 30%-40% to 40%-50% of cash flow from operations (CFFO) through the cycle, continuing to prioritise share buybacks (as management believe the shares are undervalued), while maintaining a 4% p.a. progressive dividend policy.

To deliver more value with less emissions Shell will aim to:

• Reinforce its leadership position in LNG by growing sales by 4-5% per year through to 2030.

• Grow top line production across the combined Upstream and Integrated Gas business by 1% per year to 2030, sustaining 1.4m barrels per day of liquids production to 2030 with increasingly lower carbon intensity.

• Drive cash flow resilience and higher returns in the Downstream and Renewables & Energy Solutions businesses where around 20% of the company’s capital employed currently generates a negative return. This will be achieved through focused growth in the high-return Mobility and Lubricants businesses, directing up to 10% of capital employed by 2030 across lower carbon platforms, and through unlocking more value from the portfolio of Chemicals assets by exploring strategic and partnership opportunities in the US, and both high-grading and selective closures in Europe.

Now, back to today’s results. In the three months to 31 March 2025, adjusted earnings fell by 28% to $5.6bn, well above the market forecast of $5.0bn. Compared to the previous quarter, earnings rose by 52%, reflecting lower exploration well write-offs, lower operating expenses, and higher Products margins. Oil and gas production fell by 2.5% to 2.8m barrels a day. Underlying operating expenses fell by 7%.

By division, compared to the previous quarter, Upstream generated a 39% increase in adjusted earnings, while Integrated Gas rose by 15%. Elsewhere, Marketing grew by 7%, Chemicals & Products moved from a loss to a profit, and Renewables incurred a smaller loss than in the previous quarter.

The group spent $4.2bn on capital expenditure in the quarter, 7% less than last year, leaving it well on target to hit its full-year target of $20bn-$22bn. The group generated $5.3bn of free cash flow to leave net debt slightly higher at $41.5bn, with gearing at a comfortable 18.7%.

In March, Shell completed the previously announced acquisition of 100% of the shares in Pavilion Energy a Singapore-headquartered company which operates a global LNG trading business.

With today’s results, a Q1 dividend of 35.8c a share was declared, 4.1% above the same quarter last year. A similar rate of growth for the full year would generate a yield of 4.5%. With the latest $3.5bn share repurchase programme completed, a new $3.5bn buyback has been announced today to be completed by the end of July. As a result, total shareholder returns in 2025 could amount to more than 11% of the current market cap.

We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.

In common with all the oil majors, Shell is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. The company does this from a position of immense financial strength. The shares remain on an undemanding valuation (PE 10x), both in absolute terms and relative to its US peers, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.

Source: Bloomberg

Yesterday lunchtime Becton Dickinson released results for the second quarter of its financial year to 30 September 2025. As expected, organic revenue growth slowed, however the result was below market forecasts and, in response, full-year revenue guidance has been trimmed. The group’s restructuring programme continued to drive margin expansion and EPS came in a touch better than expected. The company also provided an estimated tariff impact for the final quarter of FY2025 which led to a 2% cut in EPS, although the full-year impact for FY2026 is likely to be much larger without further mitigating actions. Regarding the planned separation of its Biosciences and Diagnostic Solutions business, the company has said there ‘continues to be strong interest in the assets’ and expects a transaction this summer. Overall, however, investors remain very frustrated with the company’s poor execution and the shares were marked down by 18% during yesterday’s session.

Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company should benefit from increased demand for healthcare from an ageing population and in emerging markets.

The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. The latest move is a plan to separate its Biosciences and Diagnostic Solutions business to enhance strategic focus and create value for shareholders. After the separation, the New BD is expected to have revenue of $17.8bn, with a $70bn+ addressable market growing at approximately 5%. It will have leading positions across four new operating segments: Medical Essentials, Connected Care, BioPharma Systems, and Interventional. The separated Biosciences and Diagnostic Solutions business is expected to have $3.4bn of revenue with a $22bn+ addressable market growing at mid- to high-single-digits. The board is exploring all separation options such as a Reverse Morris Trust (merger), sale, spin-off, or other transactions. There is still a lack of clarity around the financial impact of the separation – a transaction is expected by the end of the summer.

In the near-term, the business faces several headwinds and there are concerns over the quality of forecasting and execution.

During the three months to 31 March 2025, Becton’s revenue grew by 4.5% on a currency-neutral basis to $5.27bn, just below the market forecast of $5.35bn. Organic growth (i.e., excluding acquisitions) was only 0.9% as the anticipated market headwinds impacted the business more than expected.

The macro environment in China remained a challenge, stemming from value-based pricing as government buyers look to control costs, a slowdown in biotech research spending, and a clampdown on corruption. The company now expects full-year revenue in China to decline in the high single digits. Elsewhere, growth was also impacted by transitory market dynamics which resulted in lower market demand for research instruments as government clients cut spending and customer inventory de-stocking in anti-coagulants.

By region, growth in the US (+7.0% to $3.1bn) outpaced the international business (+4.8% to $2.2bn). By division in the quarter:

• BD Medical (52% of sales) grew by 3.6% in organic terms, driven by mid-single digit growth in Medication Management Solutions and low single digit growth in Medication Delivery Solutions and Pharmaceutical Systems.

• BD Life Sciences (25% of sales) declined by 2.4%, held back declines in Diagnostic Solutions (DS) and Biosciences that were partially offset by low single-digit growth in Specimen Management.

• BD Interventional (23% of sales) fell by 1.1%, driven by a decline in Urology & Critical Care which includes an outsized prior-year licensing.

Margins expansion is being driven by the BD Excellence programme. In the latest quarter, the gross margin rose by 190 basis points at constant currency to 54.9%, while the adjusted operating margin increased by 60 basis points to 24.9%. Adjusted EPS grew by 7.3% on a currency-neutral basis to $3.35, versus the market forecast of $3.28.

Free cash flow is down by 44% to $623m in the year to date due in part to the build of strategic inventory ahead of tariffs. Following recent acquisitions, Becton’s financial leverage stands at 2.9x net debt to EBITDA in line with expectation. The aim is to de-lever back down to its long-term target of 2.5x within 12 to 18 months.

Although free cash flow will mainly be used for debt repayment, the group is also buying back its shares – management believes there is ‘strong intrinsic value’ in the shares. The company has committed to a $1.0bn share buyback by the end of the calendar year, with $750m repurchased year to date.

Cash flow will also be directed to internal growth opportunities, bolt-on M&A, and the dividend. The group currently spends just below 6% of revenue on R&D, with 60% directed towards what the company calls transformative solutions. More than 20 key new products were launched during the last financial year, on the way to the group’s target to launch 100 new products by FY2025. In particular, the company notes that the GLP1 market is a $1bn opportunity as its devices are used for the delivery of weight-loss drugs. The group also highlighted how AI is being used to make the most of the data generated by the companies three million smart devices.

The company has announced its intention to invest $2.5bn in US manufacturing capacity over the next five years, further strengthening its position as the largest US manufacturer of medical devices and its commitment to ensuring a resilient US health care system. The new lines will boost BD’s capacity of domestically manufactured safety-engineered injection devices by more than 40% and conventional syringes by more than 50%.

A progressive dividend policy has been maintained for 53 consecutive years, with an indicated annual payout for FY2025 of $4.16, up 9.5%, and equal to a yield of 2.3%. For the current quarter, a payout of $1.04 has been declared.

The company has cut its fiscal 2025 guidance including the estimated impact of recently announced tariffs. Overall, management believes the group is well positioned to accelerate growth as markets recover and has taken decisive mitigation actions to navigate the current macro environment. For now, the market isn’t giving the company the benefit of the doubt.

- Organic revenue is now expected to grow by 3.0%-3.5% (vs. 4.0%-4.5% previously). Given the rate of growth in the first half, that still requires a pick-up in the remainder of the year – Q3 is expected to come in at c.3% and Q4 at c.4%.

- Adjusted revenue (including the impact of M&A) is expected to grow to $21.8bn-$21.9bn (vs. $21.7bn-$21.9bn previously), reflecting an improvement in the estimated impact of currency.

- Before the impact of tariffs, the company expects adjusted diluted EPS to be consistent with its previously issued guidance of $14.30 to $14.60, which represents growth of 8.8% to 11.0%, and includes absorbing a currency headwind. Strong operational performance, driven largely by margin improvement, is enabling the company to fully offset the earnings impact of its lowered organic revenue growth expectations.

- However, including an estimated tariff impact of $0.25 for the fiscal year the company now expects EPS to be in a range of $14.06-$14.34, which represents year-over-year growth of approximately 7.0%-9.1%.

Source: Bloomberg