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2016 in review: Royal Dutch Shell plc

Photo: Royal Dutch Shell. Fair use.

Royal Dutch Shell (LSE: RDSB) hasn’t cut its dividend since World War Two, but an oil price war and a massive deal to acquire BG, labelled by some as foolhardy, have hung over the oil behemoth and its famous payouts in recent years.

Despite these worries, Shell shares have climbed from the 2015 closing price of 1,543p to 2,314p at the time or writing, a 50% increase.

Today, I’ll take a look at how Royal Dutch Shell has navigated 2016 before asking the question; is the dividend safe next year?

Uncontrollable commodity

Perhaps one of the most attractive narratives a few years ago was that scarcity would prop up the oil price. It is, after all, a finite resource and the world’s energy demands are increasing at a rapid rate.

This view was crushed rather quickly back in June 2015, when the oil price didn’t just fall, but rather it crashed and fell through that magic $100 mark to under $50 by the end of the year.

The rout reached fever pitch at the start of this year, with a glut of supply dragging the price down to under $30 (with fears of even further falls) a barrel at around the same time that Shell sealed a $53bn deal to acquire rival BG Group.

There was plenty of uncertainty in the oil market without the mammoth task of integrating two massive businesses. These factors likely explain why the share price had fallen to lows not seen since the financial crisis.

What’s the B(i)G deal?

Hindsight is a wonderful thing, but with the oil price now sitting around $50.00 a barrel the BG deal doesn’t look as scary as it did a year ago. But the magic number seems to be around $60 for the deal to pay off, so there’s still a little uncertainty hanging over the acquisition.

But the oil price aside, it seems Shell and BG were natural suitors. The two operations have successfully integrated well ahead of schedule and seemingly without a hitch. Check out the promising cost synergies management has already created: “Our underlying operational costs in 2016 are already at an annualised run rate of $40bn, $9bn lower than Shell and BG costs in 2014.”

According to management there’s more savings to come and capital expenditure is budgeted around $25bn next year, not that far off half the combined capex of BG and Shell in 2014.

Can we rely on Shell?

Shell’s financial results have been improving, with Q3 EPS coming in at $0.17 compared to Q2’s $0.15. That said, the company is still funding the dividend through debt and disposals and with gearing fast approaching 30%, the payout looks shakier than many other FTSE 100 income stalwarts. But I’m confident the company can weather low oil prices for some time yet, so I’m not worried about the payout for now. 

I've been impressed by the company's cost management in this difficult period and believe it's  well placed to prosper in the future if the oil price stabilises above $60. I still believe it's a solid prospect for long-term investors and own the shares myself, but it would be understandable if some income seekers steer clear of this yield for now.

If you feel uneasy about Shell's yield, you should consider our top income stock for 2017. The company in question trades on a PE of only 10 and yields 3%. That might not rival Shell's 5%-plus payout yet, but the dividend increased 45% in 2015, 10% in 2016 and has the earnings cover to continue expansion.

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Zach Coffell owns Royal Dutch Shell B Shares. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.