How Strong Are Royal Dutch Shell Plc’s Dividends?

royal dutch shellRoyal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has suffered a couple of years of falling earnings per share (EPS), but it hasn’t really hurt the share price — over the past three years it’s kept track with the FTSE 100 pretty closely, standing at 2,538p today.

The thing is, with exploration projects often taking many years to come online and with oil prices and demand varying considerably, it’s not a short-term business and profits are often erratic from year to year. And in the past year or two, upstream costs have risen and retail demand for oil and gas has actually been weakening.

Is the cash there?

So if dividends are to remain stable, companies like Shell need to be sure they’re well covered in the good years and that there’s sufficient cash to keep them going through the tougher years.

And looking back over the past few years, that’s pretty much what’s been happening.

Back in the crunch year of 2009, Shell’s EPS of 160 cents didn’t cover its 168 cents dividend that year — a dividend which, incidentally, yielded 5.4%. But the dividend was pegged at that level for the next two years, while EPS recovered to 304 cents the following year and to 461 cents by 2011 — and that was enough to cover the dividend 2.7 times over.

We’ve since seen a couple of years of falling earnings, but last year’s dividend payment of 180 cents was actually still covered 1.5 times. Does that sound enough?

Scrip, too

Well, there’s another factor that contributes to the reliability of Shell’s annual cash handout — the company’s scrip dividend scheme. Not everyone actually takes the cash, preferring to accept extra new shares in its place.

In fact, in the first quarter of 2014, out of $2.8bn in dividends handed out, $1.3bn took the form of scrip — which was $1.3bn in cash that Shell did not have to find. It did actually have spare cash, and used $1.2bn to buy back shares for cancellation. Issuing new scrip would normally dilute future per-share payments, but at least that’s largely countered by the repurchases — and it suggests that Shell should be able to comfortably cover future dividends.

Cover set to rise

Looking forward, the City is forecasting small rises in the dividend to approximately 190 cents for this year and 195 cents for 2015. And with EPS expected to recover by 40% this year, we’d see this year’s dividend almost twice-covered again.

Are Shell’s dividends reliable? I’d say so.

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Alan does not own any shares in Royal Dutch Shell.