If you’re invested in oil company Royal Dutch Shell (LSE: RDSB), chances are you’re there for the dividend. The firm’s Chief Executive Officer is on the same page, recently saying that Shell’s profits enable the company to pay competitive dividends to shareholders and to finance new investments in oil and gas. He reckons the firm’s long-term strategy is sound.
Steady income
However, Shell’s record of dividend growth seems poor:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Net cash from operations ($m) | 21,488 | 27,350 | 36,771 | 46,140 | 40,440 |
| Adjusted earnings per share (cents) | 160 | 304 | 461 | 432 | 266 |
| Dividend (cents) | 168 | 168 | 168 | 172 | 180 |
The firm’s forward strategy aims to improve investor returns by focusing on what it describes as better financial performance, enhanced capital efficiency, and strong project delivery. Part of the plan involves a picky approach to project choices and $15 billion of divestments during 2014-15, which has echoes of rival BP‘s recent strategy. Shell’s growth plans could see around 30 major projects add about seven billion barrels of oil, or gas equivalents, to its reserves, which are likely to boost cash flow by $15 billion before the end of 2015 if the oil price holds at about $100 per barrel. Recent first-quarter results are encouraging, showing better profitability.
Cyclicality
However, the business of finding and producing oil and gas is fraught with uncertainty and the end financial result is at the mercy of fluctuating commodity prices. That’s one reason for oil companies to maintain a modest P/E rating. Another reason is the inherent danger and unpredictability of operations. Look no further than BP’s Gulf of Mexico disaster to see how operational setbacks can bring even multi-billion capitalised companies to their knees for years.
Forward prospects for Shell sound convincing and I think that might be why the share price is ahead of itself. At today’s 2460p, the shares deliver a forward P/E rating of more than 11 for 2015, yet forecasters expect earnings to grow just 1% that year. Meanwhile the forward dividend is running at about 4.7%. That might sound good, but it’s probably all investors can rely on if past pedestrian long-term share-price performance is anything to go by, which I believe it is.
What now?
The Shell share price has risen a lot since the cyclical lows around 2008. However, forward capital gains could be harder to achieve as the firm’s growth agenda fights the industry’s inherent cyclicality. If I had gains in a Shell investment, I’d be thinking about taking them now.
