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Addressing The Royal Dutch Shell Dividend Concerns

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Screen Shot 2015-07-31 at 19.22.09Christopher F. DavisAug. 27, 2015

Summary

  • Shares of oil majors have been crushed and Shell is no exception.
  • Concerns over the dividend are being raised.
  • I discuss the possibility of a dividend cut and what I see as likely happening.

Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) has been crushed in the last three months, and of course, over the last year since oil began its selloff. At the time of this writing oil is rebounding back above $40, but I wanted to address something very important about the stock. Its dividend. I recommended it in several articles, and explained the differences between the two types of shares. Through dividend compounding, this stock belongs in your portfolio, particularly a tax advantaged retirement account. But there has been whispers of fear that because of the oil slump, profits will be decimated and as such the dividends are in jeopardy. While the threat to profits is real, the concerns over the dividend are far overblown. I strongly believe that the dividend is more than safe. And at a 7.6% yield, you should be buying hand over fist at these levels and lower.

So why am I so confident in Shell’s ability to maintain its dividend? After all, oil under $40 a barrel decimates the company’s ability to make money. The answer lies in the proud history of the company and the dividend. Now I know the naysayers will blast me and say “past performance is no guarantee of future results” or something similar. While there is some truth to that, I don’t think it applies here. Do you know when the last time the company cut its dividend? I will give you a hint. Everyone reading this article either wasn’t alive or is too young to remember. The answer is 1945.

While the market is pricing Shell for a dividend cut, given it’s yielding 7.6% here, the highest it has been in 20 years. But this is opportunity. Shell is extremely proud of its dividend. It has stood the test of time and has survived history’s major oil gluts without cutting the dividend. I mean, even when oil was under ten bucks a barrel during my childhood. No dividend cuts. Let us not forget in recent calls that CEO Ben Van Beurden has stated multiple times it’s the company’s top priority to return cash to shareholders. While we certainly won’t see a dividend hike anytime soon, a cut is not in the cards.

Why? The company will do everything it possibly can to ensure the dividend remains. This includes selling assets, slashing jobs, cutting salaries and reducing exploration spending. The company knows how to manage its cash flow in times of oil crises. Do not get me wrong. Prolonged low oil prices could harm the company as they try to maintain their dividend. The company has to maintain expenditures to its operational activities. It can only cut to a certain level. In the midst of an expensive acquisition, a prolonged oil glut is a risk factor. However, compared to just 10 years ago, the company, like its competition, are in strong shape thanks to their ability to reduce costs when needed. You can thank the Great Recession for that positive development.

Let’s not forget that Shell also is slowing down the share buybacks, even with oil these low prices in shares being an attractive point to repurchase. It’s a balancing act. Less shares on the market increases earnings per share and can protect dividends. But sufficient cash needs to be on hand to pay dividends. Another thing to remember is that Shell’s Scrip Dividend plan allows dividend to be paid in shares of RDS.A (tax free) as opposed to in cash, whether you hold RDS.B or .A class shares. The company also has been diligently working to cut the breakeven point on the price of crude. Right now, it’s just under $80. That is, the company breaks even based on costs and sales at $80 a barrel. This is down from over $100 just a few short years ago. On top of that, this has not factored in all of the recent cost cutting measures. This breakeven price could drop further with the Scrip Dividend, impact of buybacks, salary and spending reductions.

While past performance is not a guarantee of what will happen in the future, in this case, it’s a pretty damn good indicator. The company hasn’t reduced its dividend in 70 years – through multiple wars, a number of economic crises, sub $10 oil, the Great Recession, etc. At a 7.6% yield that’s more than safe for the foreseeable future, I’m a big buyer at these levels and below for the long term.

Additional disclosure: I only own RDS.A shares because I participate in the Scrip Dividend program as a primary owner of B class shares

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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