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Royal Dutch Shell: I Was Wrong As Shell Rewrites Its Dividend History With A 66% Cut

May 01, 2020 8:30 AM ETShell plc (SHEL)386 Comments
Stefan Redlich profile picture
Stefan Redlich


  • Shell's relatively strong Q1/2020 results were overshadowed by a 66% historic dividend cut.
  • A prolonged period of economic uncertainty, weaker commodity prices, higher volatility and an uncertain demand outlook left Shell no other option.
  • The dividend cut has slashed Shell's dividend yield from around 10% to around 4%.
  • As painful and disappointing as such a cut can be, it ultimately is a prudent move and should help Shell overcome this storm without any further drastic moves.

Following up on my birthday on April 28 where Wirecard (OTC:WRCDF) shocked markets with a disappointing and devastating special KPMG report that has seen the stock drop by almost 1/3, it was only two days after that Royal Dutch Shell (RDS.A) (RDS.B) delivered another heavy blow to my portfolio.

Following unprecedented market conditions in Q1/2020 and in April, Shell did the previously unthinkable and slashed its dividend by 66%. Out of all the dividend cuts and suspensions this pandemic has already brought to my portfolio, this one comes as a shock as obviously pinpoints that I was wrong when I declared that "Shell will do whatever it takes to maintain the dividend in the short term." The dividend cut marks the first time since World War II and easily overshadowed Shell's Q1/2020 earnings and its outlook.


Source: Edie.net - all image courtesy remains

For years Shell has been active in portraying the stock as a world-class investment case, and while it was able to weather the 2015/2016 oil glut, this pandemic which sank crude oil prices firmly into negative territory is unprecedented and the result of dual black swan. As such while I am obviously disappointed that the dividend was cut that early, here are my thoughts on what matters now.

What is going on at Royal Dutch Shell?

Apart from declaring its first-quarter 2020 interim dividend, Shell also released earnings for Q1/2020. Unsurprisingly profits tanked with earnings down 46% and income from Shell's Upstream segment collapsing from $1.5B to $0.3B.

A historic collapse in oil prices in Q1, although the real carnage happened in April actually, is accompanied by a high degree of uncertainty around macro economic recovery. While stock markets have been rallying tremendously since hitting their low in mid-March, the real economy paints a completely different picture. Unemployment claims have reached over

This article was written by

Stefan Redlich profile picture
I am working as a Business Analyst and Data Engineer in Germany and have started to build up a portfolio focused on Dividend Growth, both on the high and low-end yield spectrum. Primary focus is on Blue Chips with long-reaching dividend track records. I have been investing for 2 years and have been standing on the sidelines for way too long before. I love developing spreadsheets in Google and Excel to analyze financial performance and integrate these two sources with each other!Happy to connect on the various channels!

Analyst’s Disclosure: I am/we are long BP, RDS.B, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (386)

CorvetteKid profile picture
The reason the dividend was cut so quickly and so sharply -- not even a scrip dividend !!! -- is because the LNG business is a disaster.

They expected $12 or more for LNG. They are getting less than $5.
Booban profile picture
@CorvetteKid Thats interesting. Why so little? Wouldn't have thought the gas energy market to be so unstable.
CorvetteKid profile picture
Tied to Brent and no demand.
American Muse profile picture
Shell was quite cagey and deceptive before their sharp dividend cut. Nobody saw it coming, That leaves a putrid odor about the company and its management.
"In my view, Shell has not been really transparent about its unexpected and massive dividend cut."

Funny how that works, isn't it? Like they weren't too transparent about their reserves write-down a few years ago, either. Almost as if they consider shareholders second-class citizens, just above the rest-of-the-world non-shareholders, which are third-class citizens. Never thought too hard about owning Shell. Their vaunted technical expertise is often tempered by these kinds of reminders that they are highly fallible. Long XOM and CVX and while it's true I might have to eat my words, I am much more confident they know the business side better.
When oil comes back the first energy company for me to get rid of is Shell. I heard the President of Shell say basically well its too bad for those who rely on dividend income. He sounded very callus. Maybe this is the difference between an AMERICAN oil company and European one. I mean Europeans don't have much talent other than their talk, talk, talk.
Windmill Lane profile picture
I agree. I got out of Dutch investments and I'm from the Netherlands. The shareholder is a provider of capital. But that's not important enough for those management teams. Their compensation is. So...never ever invest your hard earned money in countries with no shareholder friendly climate.
So what were they for 75 years when they never cut the dividend and paid practically the cost generous one in the Oil Patch? That kinds of destroys the thesis of RDS not being Shareholder friendly.
LifeIsAHoot profile picture
> I got out of Dutch investments and I'm from the Netherlands. The shareholder is a provider of capital.

To be fair, after the initial IPO the shareholder is a provider of nothing.
Mountain Marmot profile picture
The majors disconnected from crude about a month ago. Additionally, they had taken an exceptional clubbing beyond the general market. Right now in after hours, they are positive vs s&p down 2.8%. I think they'll surprise with relative strength going forward. Never say never.
I understand the dividend cut at this particular time, however I would expect them to restore it if and when the double crises, Covid 19 and the oil price war is over, but I doubt they will do that, so I will sell my stake if and when I recover my quick and unexpected loss!
Like COP and KMI did right

Yeah Right. This is your new normal. I know.

COP has done well since the Cut. KMI is not a good company, Shell and COP are. I get a laugh out of anyone that brags about a dividend that is being paid on borrowed money. A big belly laugh.
It will be a LONG time before our world can change to Green and get away from fossil fuels. The need to power trucks, trains and planes will require oil based products for many years. While I am disappointed in the dividend cut, it should allow Shell to recover faster and hopefully restore the dividend.
The first part of what you say is true, but, as to the second the glut of oil will insure that Shell remains in the doldrums for the rest of its existence even after the viral effects dissipate. Its business model is not consistent with great earnings. It is a business model that is consistent with running a mom and pop grocery store and its earnings will show that for the rest of its existence.
I agree with you. If anyone is counting on an oil rebound this stock will still have limited upside. Let’s say 50% for discussion. On the other hand there are many oil stocks with upsides in the hundreds of percent with no more risk than Shell.

"To cover that $14.7 billion payment—third-highest among S&P 500 companies—along with its aggressive capital spending, Exxon needed crude to fetch about $77 a barrel, the highest breakeven among oil majors, according to RBC Capital Markets."

XOM should be trading a lot lower as well. That breakeven is just phenomenal. Time to cut the dividend XOM. And then start gowing again from a lower base.
Shell will now go a LOT lower. If you must own oil its not a horrible choice it just can be had cheaper. Infact everything else will too, even big tech will at some point.
I thought Shell was previously investing more in alternative energies vs their peers. In other words, they were trying to diversify themselves as an “energy” company rather than just an “oil” company. Whatever happened to that? Just a bunch of BS??
Shame on these authors pumping Shell writing about how their dividend was iron clad and they cut their dividend more than anybody in the oil industry dead money here wait to buy under $10
I'm not sure where Shell is headed but regardless of the CEO being a horrible communicator, I'm holding at least 1 year from today. I saw this comment on another site and found it interesting.

Agent Xero2 minutes ago
Shell was correct to cut the dividend. They probably took advantage of the circumstances to cut it more than they really had to, but they will take the opportunity to redirect that cash normally paid out as dividends into debt reduction. It's a good move. They can reduce debt quickly and substantially and get it over with, so to speak. Another reason to be cautious is that although natural gas is not going away any time soon, recent indications are that the transition to renewables may be larger than expected and thus the transition to natural gas will not be as large as hoped. So they have to take that into consideration also.

If the oil and especially gas business bounces back strong in a couple of years, I think there is every possibility that Shell will restore a dividend on a scale that it had before. If they have that kind of cash flow, they will restore a generous dividend. If the oil and esp gas business doesn't bounce back as they hope, then Shell will instead increase the dividend gradually and use cash flow to ensure the business is evolving properly over future years. That will probably not be particularly lucrative but it could be. And it's better to take an unexciting transition and be happy with that than see the bottom fall out with nowhere to go.

A strong factor on their side is that the Russians and Saudis are absolutely getting crushed by low prices now. IT cvan't last. The stability, the very future, of those significant countries is at stake. There's no way ultra low prices are going to persist for too long. That will help Shell and other oil and gas companies.
Bin there dun that profile picture
Amazing! A contributor to SA who actually admits when he's made a bad call. Hat's off to you, Stefan.
"I was wrong when I declared that "Shell will do whatever it takes to maintain the dividend in the short term."

@Rida Morwa @PendragonY
PendragonY profile picture
@Bin there dun that

You should try reading the whole article. It is clear that Shell said things that would lead people to believe the dividend was safe and that given it is the only one to cut it is a "shock". So Steven isn't saying anything we haven't said.
Rida claimed we may never see RDS this low right before the dividend cut and crash...Even after the crash of all his reits and preferred he is still getting it wrong

Mutual funds were created for people like this
Montana13 profile picture
Stefan, good reading you admit to being wrong. Most of your peers won't do this. I have a substantial position in RDSA bought when it yielded 5.5% I bought last fall, and it is my income fund when government securities were in the 1.5%. So about 4% doesn't concern me. This is the best run energy company there is, and they will grow going forward. Too, I can sell the RDSA and take the tax loss and still buy RDSB to stay in the saddle. Great company !

I'm torn on whether this is dead money or one to hold. I did notice that Friday, even after the dividend cut....the stock start going UP in the morning and only went down when the DOW dropped so much. Could this cut actually be a good thing for share price?
Mountain Marmot profile picture
Agree on RDS. I think all the Majors will cut due to current conditions. BUT, feel they will get back to above average yields as soon as able, because this gives them cover from an increasingly harsh social pressure on fossil energy (sort of the don't bite the hand that feeds). This buys them the obvious goodwill of governments and regulation.

Still...long and heavy xom, bp, rds.b, cvx, tot, xle, bgr, iez, xes
Booban profile picture
@Dead Broke I know right. This stock market doesnt make sense. Rds.b still refuses to go below 30.
Dividend Pro profile picture
Is there actually any dividend payer in the UK, that is not a crap UK stock?

HSBC - crap
RDS.B - crap
Lloyds - crap
Standard General - crap
BAE - sort of crap
Reckitt - sort of crap now and less diversified
NGG - crap, stealth dividend cut not long ago
All the grocers and retailers like Morrison - crap
RBS- crap

Can't think of one single company that is invest-able in the UK. They are all kind of brain-damaged entities.

Maybe IR, but has dividend withholding.

Oddmund Grotte profile picture
@Dividend Pro

Just throwing out ideas.
Dividend Pro profile picture
Good list guys. Yeah, forgot about UL and DEO, 2 great UK consumer stocks. Thanks.
Divkrupp profile picture
Shell is a sell to the point the yield will be at 6 to 7 %. Short after earnings annoncement
What if the people in China, India and elsewhere see the clean skies and decide that is very important in the long run? If the whole world is willing to take such a massive hit to the economy why wouldn't they be willing to take a minimal hit (comparatively) for emmision free vehicles. Just saying... what if the oil industry NEVER comes back in a meaningful way?

I thought about that, but after this lockdown people will be dying to spend money on gasoline and fly around the world I gasoline-powered planes or gasoline powered boats. This pandemic isn't changing the world forever, people will forget it quickly.
Bin there dun that profile picture
@dellis915 - All the idiots still pumping oil need to find another way to make a living. When they stop adding to the current glut, there will be a rebound in the price of crude. Simple law of supply and demand. The market has been flooded, literally = depressed prices. the world still needs plenty of oil: just not SO DAMNED MUCH!
Dan in Mexico profile picture
Right! The shale guys pump oil no matter what. Oil glut, let OPEC cut production. Looks looks like the double whammy of the oil feud between Saudi Arabia and Russia, plus the coronavirus demand Crash is going to humble those shale guys after all.
Allivest Capital Management, LLC profile picture
You sell, I buy. Looking forward to 2 years from now.
This decision is absurd.
Taken by an incompetent CEO/Board who have lost in just one precipitated move all the massive credibility capital they had gathered throughout the years. It is so absurd that I wonder wether there isn't something criminal going on !
IMHO Share price will very unlikely rebound even if they revert this decision and present a plausible explanation. Confidence is totally shatered ! Only solution is to call up a SHM and fire CEO/Board on the spot ...
Bin there dun that profile picture
@JPMarkus - The Sting came from the stealth of the sucker punch. They could have given fair warning, rather than just make a spontaneous decision. Great shades of Jeff Storey, Batman!
I was thinking the exact same thing. CTL and Jeff Storey! All the idiots who thought that cut was good are still holding onto a dead stock.
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