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Shell’s first dividend cut since WWII

Shell’s first dividend cut since WWII

Two days ago, I woke up to the news Royal Dutch Shell has reduced its dividend for the first time in 80 years. I must admit that I reread it myself three times and looked on the internet to see if it was correct. But within a few seconds I saw multiple tweets and news items. So, I wasn’t sleeping anymore. Slowly the news came to me.  O bummer, although Shell have left the dividend untouched since WW2, they really slashed it.

It was probably a difficult decision, but the oil giant could not make another decision due to the corona pandemic and crisis in the oil market. This was an interesting decision, since BP (BP), Exxon Mobil (XOM) and Chevron (CVX) kept dividends unchanged in their most recent press releases. The decision by Shell came as a shock and I think that Royal Dutch Shell is going to have a rough time for a while.

 

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Image: Shell.com

 

Shell

On April 30th Shell announced their first quarter 2020 results and first quarter 2020 interim dividend.

Due to sharply declining oil and gas prices and the drop in the demand for oil products, Shell’s net profit decreased 46% to $ 2.9 billion in the past quarter. The results were bad across the board Earnings per share fell from $0.65 to $0.37. Their financial performance was strong considering the tough operating conditions. Shell has taken steps to reduce costs and cut investments.

 

CEO and Chair of the Board

Let us take a look what the two chiefs have said:

Ben van Beurden – CEO :
In an environment like this, a strong company like Shell needs to stay resilient. We are well positioned to maintain the resilience and the prospects and the performance of this company the main focusing on three key areas.

 The first one is care, care for each other, for our colleagues, for our customers, for our communities. We must put health and safety first. The second is continuity. We must continue to serve our customers in every way we can, possible, we must aim to provide them certainty. We need to ensure that our operations are delivering products that customers need to keep functioning. And finally, we are focusing on protecting the future health of our business. We must always generate and preserve cash, especially during these challenging times.

 Considering the risks of a prolonged period of economic uncertainty, including the weaker demand in our products, lower and the less stable commodity prices, we do not consider that maintaining current level of shareholder distributions is in the best interest of the company and its shareholders.

 With that said, Shell Board has decided to reduce the amount we pay as dividends to our shareholders, and we are announcing a resetting of our quarterly dividend to US$0.16 per share. This aims to provide right balance of maintaining a strong balance sheet, protecting the value of our business and the level of shareholder returns that we offer.”

Chair of the Board of Royal Dutch Shell Chad Holliday commented:
Shareholder returns are a fundamental part of Shell’s financial framework. However, given the risk of a prolonged period of economic uncertainty, weaker commodity prices, higher volatility and uncertain demand outlook, the Board believes that maintaining the current level of shareholder distributions is not prudent. Following the announcement not to continue with the next tranche of the share buyback programme, the Board has also decided to reduce the first quarter 2020 dividend and reset to 16 US cents per share.

 As conditions allow, the Board will continue to evaluate our capital allocation priorities between ongoing investment in our business, maintaining a strong balance sheet and increasing returns to shareholders which remains our ambition.”

 

Dividend

These are extraordinary times. On April 1st of this year I wrote in my blog post An interim update From Royal Dutch Shell I think that Shell, with all the action they took, is able to survive in the current environment without a significant cut to its dividend. And that is important for a Dividend Growth Investor. But if this market is to last for more than 9 to 12 months, I’m afraid that a dividend cut will be on their agenda.

When I wrote this a month ago, I thought it was unlikely – though not impossible – that Shell would cut its dividend this year. But hey what was I wrong. Although the dividend has been under pressure for some time, news of the cut came as a surprise to me and many investors. Now I understand that such a decision is not an easy decision to make. I have read that it took four board meetings, before Shell slashed for the first time in 80 years in its dividend. “A difficult day for the company,” said Shell CEO Ben van Beurden. “No chairman of the board wants this on his track record, but it is wise to do”. Ben van Beurden will go into the books as the first post-war CEO of Shell to lower the dividend deemed untouchable.

The board of directors decided on April 30th that the dividend will be reduced by 66% to $ 0.16 per share.

 

Vrijheid Fonds

The new dividend amount represents an annualized dividend amount of $0.64 per share, reduced from $1.88. The dividend yield on current price is 4.13%.

 

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My Vrijheid Fonds consist of 455 shares of Royal Dutch Shell (RDS-A) and with this 66% decrease, my total projected dividend loss for 2020 will be €328 ($368) after taxes. Ouch! In 2020 Shell will pay me €310 ($347) in dividend after taxes.

 

Realistic Decision

With this dividend cut Shell saves an amount up to $ 10 billion annually. Okay, this dividend cut is very annoying (*understatement*). Not only for me, but for a lot of people here in The Netherlands and all over the world. Because Shell is a cornerstone of many investment portfolios, both from private investors and from pension funds. If they didn’t take this step, the company would be out of cash in a few months. And then… So, this was not an option.

And this step makes sense in my opinion. It is a realistic decision given the circumstances. By doing this the company retains sufficient cash resources to withstand the crisis. And if I look beyond my disappointment, I think there are long-term recovery opportunities, on the one hand because competitors are going to fall over and the supply will decrease as a result. In addition, the global economy will improve over time. And by reducing its dividend Shell creates more space to invest in cleaner energy. Shell has already been moving away from oil investment and towards electricity production through renewables, along with natural gas. Natural gas demand is expected to continue to grow in the coming years, which will help Shell’s recovery.

 

Conclusion

After long thinking, with a nice glass of beer (okay, more than one) I have decided to keep my shares. Why you ask, because I believe in Shell’s strategy for renewable energy and natural gas. And because I have confidence in the board of directors to make the right decisions.

What do you think of this dividend cut? And how much do you miss out in dividend as a result of this dividend cut? And of course, what will you do with you shares of Royal Dutch Shell?

That’s all folks! Thanks for reading. Be sure to leave a comment at the bottom – I love to hear your thoughts and opinions.

Cheers,

Pollie

 

 

Disclaimer: I’m not a registered investment adviser, investment professional, brokerage firm or investment company. Readers are advised that information on the website is issued solely for information purposes and not to be construed as an offer or recommendation to buy, hold, or sell any securities. All information, opinions, and analyses included are based on sources believed to be reliable, but no representation or warranty is made concerning accuracy, correctness, timeliness, or appropriateness. Please consult with an investment professional before investing any of your money.

 

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7 thoughts on “Shell’s first dividend cut since WWII

  1. DutchFI

    I had just invested a considerable amount in Shell (I have much more stocks than you..), but I bought them for the long run. I have confidence in Shell, they do much more than just oil. I’m happy though my GAK is at about the current stock price. How’s your GAK?

    1. Polliesdividend Post author

      Hello DutchFI,

      Glad to have you on board as a co-owner.
      RDS has been in my portfolio since January 2005. Since that time I have been reinvested my dividend automatically (DRIP). So this means that my GAK (GAK = average purchase price) decreases with every dividend payment.
      At this moment my GAK is €14.90

      Cheers,

      Pollie

  2. J0s

    My RDS invested was on autopilot. Drip the dividend, wait 20 years and enjoy. Now this is a rude reality check and I’m seriously thinking about dumping all my RDS and and buy VanEck Dividend ETF. Same yield less risk imho.

    I’m going to reduce exposure to EU stocks for sure because they seem to care more about what government leaders want then the owners

  3. Get Rich Brothers

    Hey Pollie,

    If you’ve been holding the company and have faith in it long term, your decision to continue holding the shares is consistent with your thesis.
    With that said, I have an issue with huge reductions of this kind. If they are truly finding themselves in need of preserving that cash flow, I believe it would make more sense to suspend the entire dividend (not just cut 66%) as a slightly more extreme action which would give them even better financial security. Going half-way sends the same message to investors, but only provides them part of the benefit. Don’t get me wrong, I don’t want them to suspend their dividend—I’m just sharing my thoughts on why cutting by 66% doesn’t quite add up for me.

    Take care,
    Ryan

    1. Polliesdividend Post author

      Hi Ryan,

      thanks for stopping by. I think it would be more devastated if they skipped the dividend all together. Than almost all shareholders would run away.
      With leaving the dividend intact for just 33%, the majority of the shareholder will stay

      That is my opinion

      Cheers

      Pollie

  4. Dividende-um-Dividende

    Hi Pollie,
    yeah, the dividend cut this early hit me by surprise. All in all, it’s a rational decision for the company. These are tough times and nobody knows how long the oil price stays this low. – I own 500 shares of Royal Dutch Shell and the cut is a significant blow to my cashflow, no doubt about that. – But to sell right now is not an option. I keep my shares and ride out the storm.

    I agree with your reasoning. It’s not mismanagement what leads to this cut, but external circumstances and I like how Shell strengthens its LNG and renewable energy business

    Good luck with investing during these tough times!

    Greets,
    Susan

    1. Polliesdividend Post author

      Thanks Susan,
      I wish you also all the best and health

      Keep up the good work

      cheers,

      Pollie

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