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No Harm to Royal Dutch Shell plc (ADR) (RDS.A) Dividends

Published By: Myrna Salomon on December 27, 2016 09:41 am EST

For income savvy investors, a dividend yield of 6.95%, one of the highest in industry is certainly attractive. Having said this, Royal Dutch Shell plc (ADR) (NYSE: RDS.A) not only has such a lucrative yield, but also has history of sustaining it for the longest time.

The payout ratio is also appreciable, with company paying out dividend but retaining one third of its profits for future growth. On average, its reserves have increased by 3% on annual basis. This goes on to reflect that investors’ wealth is also increasing over time, along with company’s ability to grow consistently.

However, some argue if the dividends are sustainable in the long run or not, especially after the $52 billion acquisition of BG Group. It is important to note that prior to acquisition, Shell had around 3.1 billion of outstanding shares, which have now increased to above 4 billion. In other words, its annual dividend expenses roughly increased from $11.6 billion to $15 billion.

Additionally, the debt burden has increased. With debt not over $36 billion in 2000-2013, the scenario has reversed a bit. The company has borrowed above $50 billion mark, along with equity issuances in the form of 1 billion shares.

The Country Caller believes the dividends are safe enough, and investors should be rest assured. This is because the company has a sound liquidity position with $19 billion reserves in cash. Also, the debt burden of around $97 billion doesn’t appear to be major headwind in the short run since none of the only $30 billion needs to be paid in next five years.

However, there remains a downside—the commodity prices. Because its dividends are above $10 billion annually, the commodity prices need to sustain at higher levels, which doesn’t appear to be a far-fetched idea considering recent developments in oil markets i.e. OPEC and Non-OPEC deal that has sent positive sentiments in markets.

From an income perspective, the RDS.A stock seems to be the right option.

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