Shell Upgraded to Overweight by Morgan Stanley on Dividend Growth Prospects

Morgan Stanley has upgraded its rating on Shell (SHEL) to Overweight, establishing the energy major as a new top pick among European oil companies. In a research note, analysts led by Martijn Rats raised their price target on the stock to 3,780 pence, citing improved production visibility and significant potential for faster dividend growth.

The Case for an Accelerated Dividend

The bank's analysts argue that Shell's valuation has been constrained by its own dividend policy rather than its underlying business fundamentals. They project that the company could accelerate its annual dividend per share (DPS) growth to 10% per year into the early 2030s, a substantial increase from the 4% annual pace maintained since 2023.

This forecast is based on several factors, including growing confidence in future cash flow under CEO Wael Sawan and the observation that extensive share buybacks have "not re-rated the shares meaningfully." The analysts believe this could prompt management to shift its capital return strategy toward higher dividends, unlocking a potential 15% total shareholder return.

European Majors' Production Outlook Improves

The upgrade was part of Morgan Stanley's annual review of the upstream positions of Europe's major oil and gas firms. The report noted a sharply improved production outlook for the sector, with aggregate output from the "Big Five" now forecast to grow 2.9% annually between 2025 and 2030, up from last year's estimate of 1.2%.

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In its comparative analysis, the bank highlighted other key players:

• BP: Maintained at Overweight, with analysts expecting it to "significantly outperform its own target for balance sheet de-gearing."
• Eni: Noted as having the strongest upstream growth outlook, with production forecast to rise 4.5% annually through 2030.
• Equinor: Faces the most significant headwinds, with production projected to fall 18% by 2035 from 2025 levels.

Cautious Sector Stance

Despite the bullish call on Shell, Morgan Stanley maintained its broader "In-Line" rating for the European energy sector. The analysts cited ongoing uncertainty over how geopolitical conflicts in the Middle East and Eastern Europe will impact commodity prices and inflation.

However, they concluded that the sector's diversification benefits still warrant holding it at no less than an in-line weight within generalist portfolios.