The FTSE 100’s Hottest Dividend Picks: Royal Dutch Shell Plc

Today I am explaining why Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is an attractive dividend play.

Dividends expected to rumble higher

After three consecutive years of keeping the dividend on hold, a solid recovery in earnings growth — combined with a vast improvement in Shellthe balance sheet — has enabled Royal Dutch Shell to get payments moving higher since 2012.

And City brokers expect the company to maintain its progressive payout policy during the medium term at least, with a further 5% hike in 2014 to 189 US cents per share. An additional 3% rise, to 195 cents, is expected during the following 12-month period.

These figures generate significant yields of 4.4% and 4.6% respectively, taking out a 3.2% forward average for the FTSE 100 as well as a prospective reading of 3% for the entire oil and gas producers sector.

Robust balance sheet bolsters payout outlook

And I believe that Shell is in terrific shape to make good on these projected payments, underpinned by an anticipated 42% earnings surge this year and a further — albeit far more modest — 2% improvement in 2015. These forecasts mean that dividends boast are protected 2 times over by predicted earnings, bang on the generally considered security watermark.

Furthermore, Shell’s solid cash reserves should also keep payments on an upward keel. The oil colossus saw operating net cash ring in at an impressive $22.6bn as of the end of June, although down from $24bn at the same point in 2013.

The company has hived off a multitude of upstream and downstream assets in order to de-risk and build the balance sheet, while it has also reined in capital expenditure to build capital. Indeed, net capital expenditure fell to $1.1bn during April-June from $10.9bn during the corresponding period last year.

This meaty cash pile enabled the firm to announce a 4% improvement in the second-quarter dividend last month, to 47 cents per share, as well as facilitate its generous share buyback programme — the business has vowed to repurchase between $7bn and $8bn worth of shares over the next two years alone, and expects combined dividend and buyback sums to exceed $30bn by the end of 2015.

In the long term, I believe that the effect of significant production ramp-ups on the oil price — combined with the effect of Shell’s aggressive asset sales on future earnings– could seriously hinder the company’s ability to deliver chunky dividend growth. But should global demand rise more strongly than currently forecast, and further problems in the Middle East materialise, shareholder payments could continue to gallop higher beyond next year.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.