Earlier this year, Royal Dutch Shell (LSE: RDSB) cut its dividend for the first time since World War II. Due to the coronavirus outbreak, demand for oil plunged as fewer people traveled and more people worked from home. The dividend was been pretty dramatic as well. While BP cut its dividend by half, Royal Dutch Shell cut its quarterly dividend by 66% to $0.16 per share.
Although the coronavirus crisis has been bad, there is now a ray of hope. Recently, Britain approved Pfizer’s Covid-19 vaccine. Other pharmaceutical vaccine candidates could be approved in the near future too. Investors have taken notice, and the RDSB share price has increased substantially since late October. Management also increased its third quarterly dividend by 4% quarter over quarter.
Given everything that’s happened in 2020, here’s what I think is next for Royal Dutch Shell’s dividend.
Royal Dutch Shell dividend increases?
In terms of expectations, analysts estimate that Royal Dutch Shell will earn more in the future as demand potentially rebounds thanks to Covid-19 vaccines.
Although analysts expect RDSB to earn just $0.71 per share for FY 2020 due to the pandemic, they expect the company’s earnings per share to recover to $1.34 per share for FY 2021. Things could get even better after that as analysts expect the company to earn $1.99 per share for FY 2022, and $2.37 per share for FY 2023.
If RDSB achieves or even surpasses those earnings numbers for FY 2022 and FY 2023, management could conceivably increase the dividend back to the pre-Covid level of $1.88 per share in FY 2019.
With that said, I don’t think a quick dividend recovery will happen.
Although Royal Dutch Shell’s could theoretically pay the same amount of dividends as they did before the pandemic if earnings recovers by FY 2022–23, management has said they don’t plan to raise the dividend by much. Rather than increase the dividend a lot, they have said they hope to continue to raise it by around 4% in the following years. One reason is that management wants to pay down debt.
As of the third quarter, Shell had $73.5bn in debt and management has said they want to get that number down to $65bn. Once they get the debt down to $65bn, management has said they “will target total shareholder distributions of 20-30% of cash flow from operation“.
Royal Dutch Shell also needs money to transition into green energy. Many green energy projects don’t have as high of a return on investment as traditional giant oil and gas projects. As a result, Shell may have to invest more money to produce the same amount of profit.
Is the stock a buy?
Given that transitions are difficult, I reckon Royal Dutch Shell will face some headwinds in terms of its shift into a more greener energy mix. There could also be a variety of headwinds that make achieving analyst earnings estimates harder as well.
Nevertheless I like management and I believe they can execute. If the company achieves its earnings estimates for the FY 2022/FY 2023, I think there could be upside. I’d buy Royal Dutch Shell shares at current prices and hold for the long term.
