Today I am looking at oil leviathan Royal Dutch Shell‘s (LSE: RDSB) (NYSE: RDS-B.US) dividend outlook past 2014.
Dividends set to drive skywards
Royal Dutch Shell’s earnings performance has been locked in a tailspin for some time now, prompting many to question the company’s dividend outlook looking ahead. A confluence of rising E&P costs, weak refining margins, and oil theft at its Nigerian operations prompted earnings on a constant cost of supplies basis to fall 32% to $4.2bn during July-September.
And City analysts expect these persistent issues to crimp earnings in the medium to long term. Following an expected 18% fall for 2013 — results for which are due on Thursday 30 January — earnings are forecast to rebound 11% in 2014 before growth flatlines in 2015.
Despite this, Shell is expected to keep the annual payout ticking steadily higher beyond this year. An expected 2013 full-year dividend of 183.8 US cents is predicted to rise 2.5% to 188.4 cents in 2014, before rising a further 2.9% in 2015 to 193.8 cents. And next year’s payment translates to a chunky 5.1% yield, gushing ahead of a forward average of 3.4% for Britain’s listed oil and gas producers.
And while earnings growth looks set to remain underwhelming into 2015 at least, dividend cover of 2.1 times for both this year and next — just above the benchmark of 2 times forward earnings which generally provides decent security — should give investors peace of mind over prospective payments after this year.
Furthermore, the group’s strong balance sheet should also bolster confidence in Shell’s ability to keep the dividend rolling higher. The effect of reduced operating profit, escalating capex costs and a rising tax bill caused free cash flow to dip to $23bn as of the end of June from $24.8bn in the corresponding 2012 period. But the firm’s cash pile remains plentiful enough to keep dividend growth moving, in my opinion.
And the oil leviathan’s plans to manage its asset portfolio more efficiently should boost its cash position further and create a more efficient earnings-generating machine. Shell has made $21bn worth of divestments since 2010, and additional sales are expected to cut net capex to around $28bn per year in the future — net capex between January and June registered at $16.1bn by comparison.
Although a backdrop of rising costs and difficult refining conditions, not to mention uncertainty over the supply/demand outlook for the oil market, looks likely to persist for some time, the firm defied similar problems in previous years to keep dividend yields at sector-busting levels.
Indeed, I believe that signs of accelerating global economic activity bodes well for energy demand from this year onwards, while Shell’s new wave of blockbusting oil assets should prompt group production — and thus growth and dividend prospects — to shoot higher from this year onwards.
