There are a handful of large-cap integrated oil companies exploring, producing, refining and selling energy products. The global nature of the energy business has resulted in companies from different countries reaching the status of very large integrated oil companies. The share price results of these large energy companies have been quite similar. An investor looking for more income from a higher dividend yield should consider Royal Dutch Shell (NYSE:RDS.A) out of the group.
The first order of business is to provide an understanding of the two share classes -- A and B -- from Royal Dutch Shell. Both share classes have the same shareholder rights and pay the same dividend amounts. The only difference is the taxation of the dividend. Class A share dividends will be subject to a 15% Netherlands withholding tax. Class B share (NYSE:RDS.B) dividends are not subject to tax withholding. For U.S. investors, if Class A shares are purchased, the taxes withheld can be claimed as a tax credit and the 15% rate matches the dividend income tax rate currently in effect. The Class B shares avoid the hassle of claiming a tax credit when filing taxes. Currently, the Class A shares are trading about $2.20, or 3%, cheaper than the Class B shares. It seems a lot of investors want to simplify their taxes. Buying the cheaper shares picks up an additional 0.13% of dividend yield at the current share prices.
Here is a comparison of the dividend distributions of four of the major integrated oil companies. BP Plc (NYSE:BP) is not included in this discussion due to the erratic dividend over the last few years. The data includes the dividend payout ratio using the most recent dividend rate and the company's 2011 earnings per share.
Royal Dutch Shell
- Dividend Yield: 4.56%
- Payout ratio: 42%
Exxon Mobil (NYSE:XOM)
- Dividend Yield: 2.65%
- Payout ratio: 26%
- Dividend Yield: 3.05%
- Payout ratio: 25%
Total S.A. (NYSE:TOT)
- Dividend Yield: 6.22%
- Payout ratio: 46%
As you can see, the two European companies elect to pay out more net income in the form of dividends. In recent years, the two U.S.-based energy companies have elected to use more of their free cash flow to buy back shares. The 6% plus yield from French energy giant Total exceeds the rate from Shell, but there are a few issues with Total as an investment for U.S. investors. The Total dividend rate has not been increased since 2008, while the other three companies discussed here have steadily increased their payouts. Also, the Total dividend is declared in euros, which means the payment to U.S. investors will fluctuate with the exchange rate. Royal Dutch Shell declares a dollar-based dividend for both the Class A and Class B shares. Also, the Total share price has significantly lagged the performance of the other three stocks over the last several years -- possibly related to the lack of dividend increases.
When comparing the share price returns of Royal Dutch Shell to the two large U.S. companies, the shares of all three have provided essentially the same performance over the last year -- close to breakeven. Looking back further, Shell and Exxon Mobil have provided similar returns going back as far as five years. Depending on the time frame chosen, one or the other will show a little better performance. Over the last five years, Chevron has been the better performer of the three companies by a significant margin, but when you look at three-year returns, Chevron and Shell are right together and Exxon Mobil lags. The point is that the lower dividend payouts from the American energy companies have not produced measurably higher share-price returns when compared to Royal Dutch Shell.
The large integrated energy companies are well managed and generate very large amounts of free cash flow. With the size of their operations, they all shoot for annual production growth of 3% to 5%, and additional financial growth is primarily due to higher energy prices. A significant drop in the price of crude oil would hurt all of these companies, but that event seems to have passed five years ago and stable-to-rising crude prices is the forecast for at least the next couple of years. The selection of Royal Dutch Shell from the small group of large energy companies comes down to the attractive dividend policy. For an investor who wants to generate a larger amount of income from his or her portfolio, or would just like to receive a larger portion of corporate profits, there are no compelling reasons to choose Exxon Mobil or Chevron over Shell and accept a lower dividend rate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.