Shell shocks shareholders with a dividend cut

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Pugnacious comments about how much cash and liquidity it had at hand in both of its March trading updates on the impact of COVID-19 on its operations had seemed to suggest that Shell, just like BP, was preparing to dig in and defend its dividend. But the combination of near-term concerns over weak oil prices and long-term worries over demand for hydrocarbons and the risk of being left with stranded assets has forced Shell’s hand and chief executive Ben van Beurden and the board have sanctioned a two-thirds cut in the first-quarter payment.

Source: Company accounts

Shareholders will have been hoping that Shell followed BP’s path in trying to tough out 2020’s slump in oil prices as they are now left holding paper that yields around 3.5%, not 10%-plus, assuming four quarters of 16 cents rather than 47 cents a share in dividends.

The irony is that free cash flow comfortably covered the old $0.47-a-share dividend payment in the first quarter and did so for the eighth time in nine quarter. However, oil and gas prices have since gone down and Shell was unlikely to able to put such a squeeze on net working capital on a consistent basis.

$ million Q1 2018 Q2 Q3 Q4 Q1 2019 Q2 Q3 Q4 Q1 2020
Operating profit  9,303 10,539 10,646 8,878 10,565 6,169 9,533 3,909 1,741
Depreciation & amortisation  5,334 5,359 5,198 6,244 5,950 6,699 6,815 9,238 7,093
Impairments / gains   (607) (1,568) (163) (927) (65) (379) (2,039) 460 189
Net working capital   (886) (2,146) (2,627) 9,101 (3,483) 568 168 (2,033) 7,478
Tax   (2,324) (2,615) (1,834) (2,898) (2,089) (2,110) (1,511) (1,894) (1,321)
Capex   (4,789) (5,275) (5,800) (7,147) (5,121) (5,150) (5,992) (6,707) (4,263)
Operating free cash flow 6,031 4,294 5,420 13,251 5,757 5,797 6,974 2,973 10,917
Dividends  3,971 3,886 3,949 3,869 3,875 3,825 3,773 3,725 3,483
OpFcF minus Dividends 2,060 408 1,471 9,382 1,882 1,972 3,201 (752) 7,434

Source: Company accounts

Investors will now have to console themselves with the thought that the oil major has avoided doing long-term damage to itself in an effort to defend the short-term dividend payments. Cost cuts, reductions in capital expenditure and asset sales are all patch fixes to support cash flow and a dividend – and this is the playbook that served Shell so well during the oil price slump of 2015-16 – but they all potentially weaken a business over the long term, by crimping investment in its products, services and competitive position.

Taking on debt of top of that would again perhaps provide short-term dividend gain but in exchange for long-term pain, in the form of interest payments that suck away cash which could otherwise be used to invest in the company’s primary purpose and proposition.

And the Shell board will be well aware that the company’s net debt position has surged from $1 billion in 2005 to $73 billion today, thanks in part to acquisitions (notably BG in 2015), $153 billion in dividends and $48 billion in share buybacks over that 15-year period. That could not carry on for much longer.

Source: Company accounts

Shell’s cut is also a blow to those investors who have exposure to the wider UK equity market perhaps through funds or collectives rather than individual stocks.

In 2019, Shell was the single-largest dividend payer in the FTSE 100, a crown it is now likely to pass to BP in 2020 – although if its fellow oil major also cracks on the dividend front then British American Tobacco would top the dividend payment tables, especially after CEO Jack Bowles’ declaration on Thursday that the firm will stick to its plan to pay out 65% of profits as dividends this year.

20 biggest dividend payers in the FTSE 100 in 2019 – last dividend announcements for 2019 or 2020, since COVID-19 crisis broke

    Dividend (£ million) 2019 % of FTSE total payment 2019 2020?
1 Royal Dutch Shell 11,612 15.5% Cut Q1
2 BP 6,491 8.7% Held Q1
3 British American Tobacco 4,826 6.4% Holding pay-out ratio 
4 HSBC 4,755 6.3% Passed Q1
5 GlaxoSmithKline 3,991 5.3% Held Q1
6 Rio Tinto 3,729 5.0%  
7 AstraZeneca 2,866 3.8%  
8 Vodafone 2,340 3.1%  
9 BHP Group 2,190 2.9%  
10 Imperial Brands 1,955 2.6%  
11 National Grid 1,710 2.3%  
12 Unilever 1,668 2.2% Paying Q1 2020
13 Diageo 1,628 2.2% Paid H1 2020 
14 BT 1,488 2.0%  
15 Reckitt Benckiser 1,239 1.7%  
16 Anglo American 1,168 1.6%  
17 Legal and General 1,048 1.4% Paying 2019 H2
18 Prudential 939 1.3% Paying 2019 H2
19 Tesco 896 1.2% Increased H2 2019
20 RELX 886 1.2% Paying 2019 H2

Source: Company accounts

Shell’s dividend cut also begs the question of how low could the FTSE 100’s aggregate dividend payment go. The end of Shell’s payment streak and Next’s shift on Wednesday from reliable supplier of ordinary dividends, and even special ones and share buybacks, shows that few dividends can be seen as entirely safe, although the recent soothing statements from consumer staples suppliers like Diageo, Reckitt Benckiser, British American Tobacco and Unilever suggest they may be among the safer options.

There are too many variables to give any forecasts on aggregate FTSE 100 dividends with conviction for 2020 especially as over 40 companies in the index have now cut, deferred, suspended or cancelled a payment for 2019 or 2020.

Assuming that:

  • Shell sticks to $0.16 a quarter it will still be the third-biggest payer in the index at just over £4 billion
  • Those firms who have reduced a payment to zero for H2 2019 or H1 2020 pay nothing at all across the whole of 2020 (which may be too cautious as the banks seem keen to pay something, assuming regulators and economic circumstances permit)
  • Analysts’ forecasts for those firms that have not cut prove accurate

Then the FTSE 100’s aggregate, bottom-up dividend forecasts currently comes out at around £54 billion, down from £75 billion in 2019 (excluding special dividends). That is enough for a dividend yield of 3.3% - nowhere near the 5%-plus indicated by analysts’ forecasts and company guidance before the Covid-19 crisis. It is still a lot better than the 0.1% Bank of England base rate or the 0.29% 10-year Gilt yield, although it comes with capital risk and the danger that more dividends fall to economic circumstance or political or regulatory pressure – firms that have accepted Government aid of any kind, in the form of business rates or VAT relief or the furlough scheme will have to tread carefully as taking taxpayer’s money with one hand and giving cash to investors with another is not a good look.

If – and it is a big if with lots of maybes along the way – if that £54 billion figure proves accurate, then just 20 firms will pay out the vast bulk of it, assuming they meet analysts’ forecasts.

  • The ten biggest payers will pay £34.2 billion, for a 2.1% yield (assuming that even the other 90 FTSE 10 firms pay zero)
  • The twenty biggest payers will pay £45.8 billion, for a 2.8% yield (assuming that even the other 90 FTSE 10 firms pay zero)
  Company Dividend (£ million) 2020 E Dividend yield 2020 E
1 BP 6,647 9.8%
2 British American Tobacco 5,087 7.1%
3 Royal Dutch Shell 4,053 3.5%
4 GlaxoSmithKline 4,014 4.7%
5 Rio Tinto 3,168 6.6%
6 AstraZeneca 2,939 2.7%
7 Vodafone 2,369 7.0%
8 BHP Group 2,102 7.1%
9 Imperial Brands 1,964 12.2%
10 Diageo 1,818 2.6%
Top 10 total   34,161 2.1%
11 Unilever 1,799 3.7%
12 National Grid 1,758 5.2%
13 Reckitt Benckiser 1,286 2.7%
14 Legal and General 1,118 8.9%
15 Anglo American 1,053 5.1%
16 BT 997 8.2%
17 Prudential 954 3.2%
18 Tesco 902 3.8%
19 RELX 883 2.4%
20 SSE 860 6.6%
Top 20 total   45,772 2.8%

Source: Sharecast, consensus analysts’ forecasts, Refinitiv data

For more information on UK-listed companies which have cut, suspended, or deferred dividend payments, take a look at our Dividend tracker.

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


russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.