Shell shows that cash is king

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“For the last two years, Shell has been dogged by concerns that its annual dividend was at risk of a cut owing to the plunge in oil and natural gas prices but today’s full-year figures for 2017 should help put such worries to rest, thanks to an extensive self-help programme and also a rebound in crude,” says Russ Mould, AJ Bell Investment Director.

“On the basis of the stated 2017 earnings per share figure of $1.58 the dividend was not covered by profits and the consensus forecast of around $2.01 for 2018 means earnings cover looks thin at around 1.07 times – when a figure of around two would give much more comfort.

“However, Shell’s cost cuts and efficiency programmes mean that cash flow is now much stronger. In 2017, free cash flow [defined as operating profit plus depreciation and amortisation minus net working capital minus capital investment minus tax] more than covered the dividend, even once those important expenses have been met.

“This explains why the company now feels able to abandon paying some of its dividend, which comes to around $3.9 billion a quarter or $15.6 billion a year, in shares (or scrip).

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Source: Company accounts. *Assumes entire dividend paid in cash. **Actual dividend payment made by the company, adjusting for scrip.

“It is cash flow that pays the dividends, not stated profits (as shareholders in Carillion and Capita can attest) and the shares have already responded to the improved performance. Had cash flow not improved, Shell could have continued to sell assets or increase debt but both strategies would have potentially weakened the company’s strategic position and future operational performance.

“The share price has responded to the stronger cash flow and the lower strategic and financial risks, especially as debt may have peaked too, following 2015’s acquisition of BG, the plunge in the oil price and the ongoing (uncovered) dividend payments.

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Source: Company accounts

“As a result, Shell is no longer among the ten highest dividend payers in the FTSE 100, although its prospective yield for 2018 of 5.8% is still likely to catch the eye of income-seekers and it is noticeable how the share price still trades below its historic average relative to the oil price, at 37 times the price of crude compared to the post-1990 average of nearly 44 times.”

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Source: Thomson Reuters Datastream

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.