The news that Royal Dutch Shell (RDSB) has cut its dividend for the first time since the Second World War is not a surprise in one sense given the collapse in the oil price but still feels like a shock.
The shares are down 7.3% to £13.45 on the news as the company hasn’t just trimmed its quarterly payout but slashed it by two thirds. This comes days after BP (BP.) opted to maintain its own dividend.
BP is opting to take more strain on its balance sheet with its gearing level flexed to 36% while Shell remains below 30%. Investors will fear that the divi will remain at these levels for some time given commentary suggesting the conditions which necessitated this historic action will persist through the course of 2020.
Shell’s first quarter numbers revealed a loss of $24m and current cost of supplies (CCS) earnings attributable to shareholders excluding identified items (Shell's preferred measure of profit) of $2.9bn.
This reflected lower realised oil, gas and LNG prices, weaker realised refining and chemicals margins as well as lower sales volumes, compared with the first quarter of 2019.
Cash flow from operating activities excluding working capital movements was $7.4bn during the first quarter, which it attributed to lower earnings and higher cost-of-sales adjustment, partly offset by higher cash inflows related to commodity derivatives and lower tax payments, compared with the first quarter of 2019.
‘BITTER PILL’ FOR INVESTORS
Kit Atkinson, head of capital markets for Corporate Markets EMEA at Link Group, said: ‘Shell has administered a bitter pill to investors. A two-thirds cut in its dividend (its first since WW2) is not surgical precision, it’s amputation, and is more evidence of the appalling damage the pandemic is doing to the world economy. With this move Shell has relinquished its position as the world’s largest dividend payer.
‘If the payout remains this low for the rest of the year, it will cost Shell’s shareholders £5.6bn in lost income in 2020 and even more next year.
‘Cutting its dividend so deeply is prudent given the times we are in, and is an acceptance that years of trying to maintain such a high payout, even during periods when oil prices have been too low to generate profits for the group, is no longer sustainable.’
AJ Bell investment director Russ Mould says: ‘Very weak oil prices have put management in the oil sector in a tricky place and they need to do everything they can to survive the crisis.
‘Norway’s Equinor recently set the tone for the oil sector payouts by cutting its dividend. BP said it would continue paying as per normal for now, but Shell’s actions could lead to BP potentially reassessing its position in the near future.’
