Blood, oil, tears and sweat: Shell’s dividend cut

Tuesday 19th May 2020

Royal Dutch Shell, the largest dividend payer in the FTSE100, cut its interim dividend by two-thirds from US$ 0.47 to US$ 0.16 per share last month. It is the first time the company has cut its dividend since the Second World War.

An interim dividend is a distribution to shareholders that has been paid before a company has determined its full-year earnings.

A collapse in oil prices and demand triggered by coronavirus has almost halved the energy company’s earnings, reflecting a broader trend in the industry stemming from severe lockdowns and travels bans in much of the world.

Shell, and the oil industry as a whole, was often embraced as a consistent source of healthy dividends but the pandemic has put the Big Oil investment case in doubt.

The dividend cut forms part of the company’s ‘reset’ policy, already in place due to uncertainty over commodity prices in a world moving towards cleaner fuels.

Additionally, Shell has suspended its share buyback programme and announced a decrease in capital expenditure to less than $20bn this year combined with a $1bn decrease in operating costs.

These measures may come as a ‘crude awakening’ to Shell, who had already pulled the typical levers of bond issuance to secure new credit lines, which have proved unable to offset the negative cash flow, meaning that the dividend cut will likely be long-term.

Shell is known for putting shareholders first: the dividend has endured through numerous bear markets, currency crises and the near-collapse of OPEC in the 1980s – so why must shareholders take a payout cut now?

Despite low demand, oil producers kept pumping, leading to an unprecedented drop in the benchmark price for U.S. oil (the West Texas Intermediate) to -$40, which can only signal deep distress for the whole economy.

This left little choice for the Executive Committee whose main concern is preserving the company’s double-A credit rating, which should be successful if the predicted $10bn saving from the cut is met.

To end on a positive note, analysts at Goldman Sachs see new opportunities on the horizon for the oil industry after the pandemic; a recent report from the investment bank suggests that lower dividends, hence more financial flexibility, could lead to more M&A particularly in the renewables industry.