A note on Royal Dutch Shell’s 6.2% dividend

Royal Dutch Shell dividend 2018 cut

There’s been considerable speculation over the sustainability of Royal Dutch Shell’s (LON: RDSB) (RDSB.L) dividend in recent years.

With oil prices dropping to around $50 per barrel, profitability at the oil giant has deteriorated dramatically, and earnings over the last two years have been significantly less than dividend payments. Obviously, this can’t continue forever. At some stage something has to give.

The oil major has paid the same dividend of $1.88 for the past three years, and while the company hasn’t cut its dividend since WW2, consensus dividend forecasts of $1.84 and $1.83 for this year and next suggest some analysts see a dividend cut on the horizon.

Cash flow

However, looking at Shell’s results for Q1 and Q2, cash flow appears to be adequate to fund the dividend payments for now.

In Q1, Shell generated operating cash flow of $9.5bn and free cash flow of $5.2bn. In Q2, the oil major generated operating cash flow of $11.3bn and free cash flow of $12.2bn. In both quarters, the dividend payments were $3.9bn. Chief Executive Officer Ben van Beurden commented in the Q2 results:  “over the past 12 months cash flow from operations of $38 billion has covered our cash dividend and reduced gearing to 25%.”

Happy to hold

With these figures in mind, I’m happy to hold my Shell shares for now. It must be said that with little dividend growth forecast in the immediate future and very thin dividend coverage (forecast FY2017 dividend coverage of 1.03), the picture is not ideal. However, with a yield of 6.2%, the BG merger completed, and the company focused on increasing capital efficiency and cost control, I’m going to hold the stock for now.

Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell B.   

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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