What Dividend Hunters Need To Know About Royal Dutch Shell plc

Today I am looking at whether Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is an appealing pick for those seeking chunky dividend income.

Dividends set to spurt higher

Despite a backcloth of consistent earnings pressure, Royal Dutch Shell has managed to get dividend growth back on track after having kept the payout on hold for three consecutive years until 2012. Indeed, the full-year dividend rose 4.7%, to 180 US cents per share, in 2014 even as earnings collapsed 39%.

Indeed, Shell has said that its strategy of greater operational efficiency and better capital discipline should continue to deliver solid royal dutch shellinvestor returns. The company notes that “with a stronger emphasis on improving financial returns and cash flow in 2014 and beyond [we] aim to deliver competitive returns including a growing dividend.

This view is shared by City analysts, who expect Shell to lift the dividend 5.9% this year, to 190.7 cents, before initiating a further 2.4% rise in 2015 to 195.3 cents. And forecasters would no doubt have been encouraged by news today that cash flow from operating activities rose to $14bn during January-March from $11.6bn during the first quarter last year.

These projections leave the oil giant with chunky dividend yields of 4.7% and 4.8% for 2014 and 2015 correspondingly, far ahead of the FTSE 100 forward average of 3.2% whilst also beating a respective readout of 2.7% for the entire oil and gas producers sector.

As well, Shell is also returning shedloads of cash to shareholders via its ongoing share buyback scheme. The business forked out $5bn for share repurchases in 2013 alone, and a programme of rolling asset disposals is expected to keep buying activity bubbling this year and beyond.

Downsizing compromises long-term payout picture

Shell’s streamlining scheme is expected to help the company arrest the earnings difficulties of recent times, with a 31% improvement expected in 2014 and a further 5% advance chalked in for 2015. Based on these figures the oil leviathan currently sports decent dividend coverage of 1.9 times for this year and next, just below the safety threshold of 2 times prospective earnings.

Still, in my opinion investors should be concerned that the company’s aggressive streamlining strategy is likely to have on production levels and long-term earnings growth, and with it the potential for sizeable dividend hikes. Indeed, the company saw  earnings on a current cost of supplies basis slip to $4.5bn during January-March from $8bn during the corresponding 2013 period.

And Shell continues to lop off upstream and downstream assets across the globe, more recently the $2.6bn sale of the bulk of its Australian projects in February.

Combined with expectations of heavy oil price weakness in coming years — a situation which could also put dividend coverage under the cosh — Shell’s ability to churn out oodles of cash to facilitate bumper shareholder payouts may be heavily compromised in coming years.

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Royston does not own shares in Royal Dutch Shell.