Not many constants have held steady in the City over the past 77 years. A few ancient watering holes, the Bank of England at Threadneedle Street and the rock solid Royal Dutch Shell dividend. That last one has now disappeared. On Thursday, the Anglo-Dutch oil producer slashed its payout by two-thirds, catching many unawares. Shell’s sacrosanct dividend was conspicuously left off last month’s cuts to investment and expenses.
This is a huge deal. Shell is an enterprise that usually considers its shareholder payout before confirming investment spending. The dividend has endured through multiple oil price bear markets, including Opec’s near collapse in the 1980s. It survived severe economic recessions and currency crises over the decades. Even after Shell’s 2015 bid for BG Group, a period when Brent crude had already halved from its recent peak, shareholders came first.
So what has changed? Unprecedented prices for the US benchmark West Texas Intermediate may have confirmed diminishing oil storage space in the US. Shell has not said anything about shutting down any of its operating wells. Instead, it has taken what looks like a lasting decision on its dividend.
Viciously volatile oil prices — even below zero last week — forced the board’s hand. Rather than suspend the dividend, they cut it, sending shares down more than 11 per cent. This despite decent-enough quarterly numbers. Net profits were $2.9bn, roughly in line with expectations. Operating cash flow jumped 72 per cent year on year to $14.8bn, flattered mostly by a boost from working capital movements. Adjust for that and Shell still generated positive free cash flow of well over $4bn.
The company’s concerns are for the second quarter and preserving its double A credit rating. Cutting the dividend should save nearly $10bn of full-year cash flow, notes Barclays.
Speaking of legacies, British pensioners will lose out. Shell and BP, which held its dividend earlier this week, made up almost one-fifth of FTSE 100 dividends. Shell’s yield shrinks to 3.5 per cent, middling among this group’s constituents. Given the secular trend away from investing in carbon-emitters, removing the high yield means Shell’s share price has lost its moorings — like so much else in this crisis.
Should Shell have held on to its dividend, or was this the right move for shareholders long term? The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.
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