The steep decline in commodity prices since 2014 has driven huge losses and dividend cuts across the industry. However, Royal Shell Shell (RDS.A) has been a pillar of stability and it maintained its hefty dividend even when oil prices fell below $30 per barrel, explains Bob Ciura, editor of Wyatt Research's Daily Profit.
As a global integrated energy company, Royal Dutch Shell has performed relatively well over the past few years thanks to its balanced business model.
Its exploration and production segment lost $3 billion last year, due to falling oil and gas prices. Still, Shell’s total profits declined just 8% in 2016. The company generated over $20 billion of cash flow for the year, which allowed it to maintain its dividend.
Part of its resilience is due to cost cuts and asset sales. Shell has driven costs down across the business, to help keep the dividend intact. Shell cut more than $20 billion from its capital spending budget in the past three years. It has also reduced operating costs by over 20% in that time.
Shell is also unloading low-margin projects that are not seen as critical to the future growth of the company. It has reached $25 billion in divestments so far, and expects to reach more than $30 billion by the end of next year. All of these actions have helped support the dividend.
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Shell’s efforts to raise cash during the downturn have resulted in a leaner, more efficient company. It has also strengthened its balance sheet by reducing debt by $9 billion over the course of its restructuring.
Now that oil prices are rising again, the company has returned to growth. Profits soared to over $5 billion in the first half of 2017, up from $1 billion in the same six-month period last year.
The Shell dividend payout is $3.76 per share annually, good for a 6% dividend yield. It has nearly covered its dividend with underlying earnings, and thanks to future growth, should have the dividend fully covered by the end of 2017.
Shell has completed multiple large projects, which have started to ramp up this year. By the end of 2018, the company expects these recently-completed projects to cumulatively add $10 billion of new, annual cash flow.
Once completed, the new projects will be a major boost to Shell. First, they will begin generating cash flow, likely at a profitable price. And Shell will no longer need to spend billions of dollars each year on those development costs.
High dividend yields of 6% or more can sometimes be a red flag. Investors interested in buying high-yield stocks should make sure the dividend is sustainable. Dividend cuts in the oil and gas industry have been common in recent years due to the rise in global production and a corresponding decline in commodity prices. The Royal Dutch Shell dividend appears to be sustainable. The company has moved to significantly cut costs and invest in only the highest-growth projects. These cost cuts have resulted in greater efficiency and higher margins.
While U.S. oil stocks typically have dividend yields of 2% to 4%, Shell's 6% dividend yield is an attractive payout for income investors.
