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Analysts concerned Shell dividend under immense risk

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Will Royal Dutch Shell plc (ADR) (RDS.A) Maintain Dividends?

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By: Micheal KaufmanSep 21, 2015

Analysts are concerned that future of Royal Dutch Shell plc’s (ADR) (NYSE:RDS.A) dividend is under immense risk, and expressed concerns that Shell will not be able to deliver its promise of 7% dividend yield. Currently, the American Depository Receipts (ADR) of Shell offers a one-year forward dividend yield of 7.6%, with quarterly dividend payment of 47 cents per share.

The glut in crude supply, China’s economy weakening, and lowered crude demand from Asian and European market has led oil prices to fall from $116 per barrel last June to below $50 per barrel this summer. Share prices of most energy companies have slumped. Companies that were once expecting crude oil prices to recover soon are now taking a long term bearish view of the oil market.

Oil companies have started cutting their capital expenditure (capex). Shell announced 20% reduction in capital spending this year. Some companies have also laid-off hundreds of workers, while others have start testing new projects at lower oil prices. Companies are trying to reposition themselves to the current economic situation, as this is the only way to survive in the market. Last week, credit rating firm Moody’s Investors Services said that energy companies including Shell should cut their production to survive in the long run. Under these circumstances, it seems that oil producers would be forced to cut their dividend. In July, Chesapeake Energy Corporation (NYSE:CHK) announced that it would suspend its dividend payment to save around $240 million this year.

Meanwhile, Shell’s basic assumption behind the BG Group plc (ADR) (OTCMKTS:BRGYY) acquisition was that oil prices will recover by the end of this decade. Currently, Shell offers 7% dividend yield to its investors. On the other hand, BG Group is trading at a discount of 10% from its offer value by Shell, and offers a dividend yield of 9%.

However, as the future of oil prices seems unwelcoming, investors and analysts are skeptical about the deal. This is evident by the fact that the Australian Competition and Consumer Commission (ACCC) has delayed its decision on the deal until November. Earlier this month, the company’s CEO, Ben van Beurden held a meeting with a group of investors to convince them that only something “cataclysmic” could stop the deal.

Market is concerned that higher dividend yield at the expense of low share prices will mean that the dividend is not sustainable and company may cut its dividend payment in the future. However, Shell has not cut its dividends over the past 70 years. Even at oil below $10 per barrel, it maintained its dividend payments and has always given priority to its shareholders.

The Anglo-Dutch company is in a good position to finance its future projects while satisfying its investors. At the end of second quarter 2015, Shell’s gearing ratio was 12.7%, much better than other oil giants. Although the completion of the Shell-BG would require the oil company to raise its debt financing, it seems that the company would still be in a strong position to finance its dividends.

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