Investors can no longer be sure of Shell

Oil giant Royal Dutch Shell, one of the market’s most reliable income providers, has cut its dividend for the first time in over 70 years. Matthew Partridge reports.

Shell petrol station © BEN STANSALL/AFP via Getty Images
Shell is grappling with the shift towards cleaner forms of energy © Getty
(Image credit: Shell petrol station © BEN STANSALL/AFP via Getty Images)

Last week Royal Dutch Shell cut its dividend for the first time since World War II, says Anjli Raval in the Financial Times. The payout for the first quarter was slashed from 47 cents to 16. No wonder. Not only did profits for the first three months of the year fall from $5.3bn last year to $2.9bn in 2020, but the oil major thinks that the situation will be “more severe” in the second quarter, with oil prices already down to $24 a barrel. The shares sank by 11% on the news.

The scale of the cut suggests that Shell believes that the crisis isn’t just a short-term event, but will cause “permanent change” in customers’ behaviour, say Anna Edwards and Laura Hurst on Bloomberg. The long-term impact on the way consumers work and travel “could be even more devastating for the industry” than the initial turmoil. Attitudes toward oil have been changing for some time “as the world shifts gradually toward cleaner forms of energy”.

The oil major’s dilemma

The rise of activism presented Shell with a dilemma, says Jeremy Warner in The Daily Telegraph. With shareholders under pressure from climate change campaigners, the dividend was the only thing keeping them on board, so the cut gives investors “another excuse to sell”. However, with the world “moving away from dependence on hydrocarbons”, maintaining the dividend would have forced them to sell off assets “until there [was] nothing left”.

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Viewed in this context, cutting the dividend was the only way to free up cash to meet its goal of transitioning to a carbon-neutral company by 2050. “Butchering the dividend” was clearly the “correct move”, since it will save Shell $10bn a year at a time when oil prices have collapsed, says Nils Pratley in The Guardian. However, rather than congratulating themselves for making a tough decision, Shell’s management should have expressed a little “remorse” over the fact that Shell has spent $16bn buying back its own shares since July 2018. The fact that the buybacks took place when Shell’s shares were trading at £22, compared with today’s £13, makes them even more wasteful. After all, it’s not as if Shell’s balance sheet was “unencumbered by debt” at the time.

Whatever Shell’s past failings, the American oil giants ExxonMobil and Chevron have something to learn from it, says Lauren Silva Laughlin on Breakingviews. Instead of doing some “soul searching”, the duo are “playing a game of chicken” with shareholders by continuing to pay their dividends. While both companies acknowledge that there is pressure for a “green world” in rich countries, they still believe that “the middle class in emerging economies will flourish, pushing up the demand for fossil fuels”. This is a risky strategy given that even last year both companies were making paltry returns on capital employed: only 6.5% at Exxon while Chevron’s figure “was a lowly 2%”.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri