Royal Dutch Shell took action in this recent crisis
Royal Dutch Shell is a Dutch-British oil company. Measured by turnover, Shell’s main activity is the refining and distribution of petroleum. Shell is also active in the petrochemical industry and with the sale of natural gas and electricity. Shell is one of the largest oil companies in the world and is part of the so-called super majors.
Royal Dutch Shell is one of the largest publicly traded oil companies. The shares of the company have been beaten, along with many other oil companies, since COVID-19 fears and the recent oil crash. You can now buy Shell with a dividend yield of more than 11%. This is an unheard of a yield or an oil major.
Skip the dividend
Today I have read an article in the newspaper with a very remarkable sound from large shareholders. They are asking big companies to skip the dividend, if necessary, for survival. Besides the large shareholders, also the Dutch Investors’ Association (VEB) -a not-for-profit and member-based organization that aims to strengthen the representation of investors – is asking Shell to postpone the decision on the dividend payment.
This is a remarkable sound in very special times: shareholders who ask companies to reduce or even suspend dividends. Shareholders traditionally strongly support a stable dividend policy and the purchase of own shares. Dividend shares are even a crucial part of the investment portfolio for many large pension funds. However, large investors are now worried about the viability of corporations craving cash because of the corona crisis.
Royal Dutch Shell recently announced its new financial policies as a result of the recent oil crash. With these actions Shell tries to maintain financially stable. In their press release Shell outlined the following goals in response to the new price environment:
Ben van Beurden, Chief Executive Officer of Royal Dutch Shell:
Today, we are announcing that we have embarked on a series of operational and financial initiatives that are expected to result in:
- reduction of underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels;
- reduction of cash capital expenditure to $20 billion or below for 2020 from a planned level of around $25 billion; and
- material reductions in working capital.
Together, these initiatives are expected to contribute $8 – 9 billion of free cash flow on a pre-tax basis. Shell is still committed to its divestment programme of more than $10 billion of assets in 2019-20 but timing depends on market conditions.
Furthermore, Royal Dutch Shell also announced that it is not continue its share buybacks. That was previously estimated to be $5-10 billion on an annual basis. And Shell also announced that it’s no longer going to be meeting its debt reduction goals.
In my humble opinion, all these actions together will place Shell in, financially, quite a strong position.
After doing some research, I have read two risks worth mentioning:
- Continuous low oil prices
- A lack of return on capital spending.
We have seen that COVID-19 fears have decimated oil prices. History is teaching us that, oil prices will continue to be susceptible to so-called “black swan” events and that’s a risk that shareholders must always be aware of.
If you want to learn more about Black swans, I can recommend the book: The Black Swan by Nassim Nicholas Taleb.
The second risk worth mentioning is a risk of a lack of return on the company’s capital spending objectives. Shell is cutting its spending from 25 billion to $20 billion in 2020. That’s a significant amount of spending. At lower prices, the chance of strong returns is also smaller
Royal Dutch Shell
Royal Dutch Shell has had a difficult time recently, as have all the major oil companies. Suspension or reduction of the dividend would be a historic decision for Shell, which has not reduced its dividend since World War II. I think that a stable dividend is an absolute priority for the board of directors of Shell.
The company is taking steps to maintain their financial stability to avoid cutting it. And I think that Shell’s natural gas segment will cushion the blow from lower oil prices. Shell is the world’s second-largest natural gas business and therefore I think Shell is the best-positioned oil major to weather the oil price collapse.
Shell has paid near $ 15 billion in dividends last year and Shell’s shares are trading at just above book value, a level we have not seen in recent memory. Together with a historically high dividend yield, Shell looks really attractive to me.
In my opinion, Shell is taking the right measures to keep the company financially strong and secure the dividend. And did I already mentioned that I really like this Oil major, which is almost 7% of my Vrijheid Fonds. And of course, Shell’s earnings will be impacted by the low price of oil, but they will survive and are a good addition to a diversified dividend stock portfolio.
I already took advantage of the low share price at the end of last month. For more information about my recent buy of Royal Dutch Shell just read my last post on it.
What is your opinion on the latest action of Shell? Have you made some changes in your portfolio in relation to one of the Oil majors? I like to hear from you
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