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Shell dividend could be under threat over audacious takeover of gas specialist BG Group

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The last time Royal Dutch Shell cut its dividend was in 1945 when the Netherlands had just endured the ‘Hunger winter’ under Nazi occupation before the end of the Second World War.

Now investors are worrying their treasured dividend could be under threat again.

Shell is embarking on an audacious takeover of gas specialist BG Group. The £36bn deal will go to a shareholder vote at the end of the month. However, with the oil price at a 12-year low, many are warning the deal does not make sense.

And worse still, some are fearful that if it does go ahead it will mean Shell won’t be able to afford to keep paying its healthy dividend.

Shell pays the best dividend in the FTSE 100 and yields around 7.2 per cent on the current promised $1.88-a-share dividend. As Steve Clayton, head of equities research at broker Hargreaves Lansdown, explains: ‘Half of Holland would keel over in apoplectic horror if Shell ever cut the payout.’

A handful of institutional investors have already pronounced their views on the deal.

David Cumming, head of equities at Standard Life Investments, has said the deal is ‘value destructive for Shell shareholders’.

But Shell argues that in the long term the deal makes sense. It says the deal adds to Shell’s cash flow when the oil price hits $50 a barrel, and starts to break even at $60.

Chief executive Ben van Beurden earlier this week said: ‘It doesn’t really matter too much where the oil price comes out because the capacity of the combination is higher than the dividend capacity of the standalone company.’

Institutional investors at Old Mutual Global Investors, Aberdeen Asset Management, Qatar Investment Authority and Henderson are all thumbs up, and last week it emerged that two large proxy advisors, Glass Lewis and ISS, have backed the deal. Standard Life’s Shell shareholding will vote against the deal. However, the funds holding in BG will support it.

So is this a sign that BG’s retail investors would also be better off voting for the deal?

There is the risk that if the deal fails to get the go ahead then BG’s shares will crash, so some may think they are better off selling now in case this happens. Most experts, however, predict the deal will go ahead and, as Russ Mould at stockbroker AJ Bell suggests, BG shareholders’ best option ‘is to sit tight, vote in favour of the deal and see what happens’.

BG shareholders have had a bit of a rough ride. There were promises of great riches but its Brazilian projects have taken longer than hoped and it issued profit warnings in 2012 and 2014. AJ Bell says some investors may even want to buy new BG shares because they are trading at around a 5 per cent discount to the Shell offer (see graph). The Shell offer is 383p a share in cash plus 0.4454 of a Shell share.

BG investors may also want to take a mix of what is on offer. Hargreaves Lansdown customers, for example, can mix and match, allowing investors to vary the proportion of cash and shares they receive. So they can either take additional Shell shares in lieu of cash or additional cash in lieu of shares. Shell’s shareholders get their say on January 27 and BG’s the day after.

BG’s 500,000 or so small investors have held their stock for many years. British Gas was privatised by Margaret Thatcher’s government in 1986. In 1997 the firm was split in two to form the oil explorer BG Group and Centrica, which owns the British Gas domestic energy operation. Shareholders then received shares in both firms.

And what about Shell shareholders? Some may look at the fall in its share price of nearly 40pc since April, when the deal was announced, and think the takeover has only been bad news. However, as Chris Wheaton, oil analyst and fund manager at Allianz Global Investors, explains, the state of the oil price – down from around $60 to below $30 – must be taken into account.

Wheaton says the negative reaction to the deal has probably hit Shell’s share price by about 15 per cent, which equates to around $25bn (£17bn) of its market cap.

And he points out that even if Shell had to reduce its dividend, it could still yield around 5 per cent.

This still would be above the market average, particularly as data from financial information service Markit reveals the total dividend income from FTSE 350 companies is set to fall by 1 per cent to £76bn.

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