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Royal Dutch Shell (LSE:RDS) has been one of those stocks beloved by both institutional and private investors. It was a share that was virtually bankable as a dividend payer. Royal Dutch Shell even went as far as to ‘guarantee’ dividends over a five year period starting in 2019.

However that all seems to have changed, and many investors have voted with their feet as Covid-19 latched onto Royal Dutch Shell’s operations and the oil price cratered.

The oil giant has already announced a two thirds reduction in its dividend. This is creating nervousness among the bigger shareholders, like pension funds, who have grown used to Royal Dutch Shell’s forward planning and careful cash management. Now, difficult questions are being asked, like how the company is going to pay out dividends going forward.

Royal Dutch Shell shares were trading at GBX 944 on March 18, before rallying sharply.  The stock had established a nice upward trend on 29 May when it came off GBX 1221. That trend was broken Monday. The shares have slid off GBX 1547 and are currently trading in the area of GBX 1350 while the market watches the oil price.

In April Royal Dutch Shell cut its dividend from 47c per quarter to 16c. It was a dramatic shift, representing the first dividend cut made since the Second World War.

What is going on with the Royal Dutch Shell dividend?

Investors and analysts are now wondering about Royal Dutch Shell’s capacity to pay an unearned dividend. Ordinarily, the company could sustain this as its cash flows run into the tens of billions. Even with $20 billion capex in a tough year, it could still have reserves to pay a $15 billion dividend. So what is going wrong here?

We think the oil market is moving into a transformative decade. We are in an historic zone of new norms as the dynamics of the fossil fuel economy are altered. Covid-19 has only a small part to play in this, but it has led to more volatility in the energy markets. But oil majors like Shell also need to consider the increasingly strident political demands for net zero carbon emissions by 2050.

Royal Dutch Shell has itself said it needs the cash to help it to shift to this new environment. What is lacking here is a proper road map of how this is going to be achieved, and more importantly for investors, whether this will lead to a semi-permament cut in dividends.

Royal Dutch Shell now looks like a company that is not going to be able to sustain its lovely dividends regime. On top of that, it does not look like a company that will be on the leading edge of the green energy revolution. There are many, many other renewable energy plays investors could consider (e.g. see our coverage on battery materials pioneer Nano One).

Headwinds from big investors

Royal Dutch Shell is also battling headwinds from big fund managers and pension funds that are being required themselves to confirm with new ESG criteria. This means no more fossil fuels giants in the portfolio, especially if the dividend yield has been crushed.

Big investors in the stock are asking hard questions: where will this cash go? How will the company survive in the new era of alternative energy technology? Go on the acquisition trail?  The firm’s management does not want to borrow to maintain its dividend commitments, and this seems sensible to us.

Other cost cutting measures are being employed: capex is being slashed, as are company bonuses. Projects are being delayed. Contractors are being fired. To use an analogy from the novel The Godfather, Shell is ‘going to the matresses.’ Seeing a big dividend payer like this entering survival mode will be unnerving for investors just as will the dearth of answers to key strategy questions.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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