Is Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) a good bet for long-term dividend provision?
You’d expect so. Even though there’s a lot of upstream exploration expense to contend with every year, requiring a good deal of capital expenditure, it’s such a mature business with such massive worldwide demand that if Shell can’t throw off decent amounts of cash, there’s something wrong.
Crash
Well, something did actually go wrong with the worldwide recession and increasing exploration costs hurting the industry, including Shell. And in the crunch year of 2009, Shell’s earnings per share didn’t even match that year’s dividend of 168 cents.
The dividends were held at that level for a couple more years until earnings started to recover, and since then the picture has looked like like this:
| Year (to Dec) |
Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 168c | 4.8% | 1.81x | 0% |
| 2011 | 168c | 4.1% | 2.74x | 0% |
| 2012 | 172c | 4.8% | 2.52x | +2.4% |
| 2013 | 180c | 4.8% | 1.48x | +4.7% |
| 2014* |
186c | 4.5% | 2.04x | +3.3% |
| 2015* |
192c | 4.6% | 2.02x | +3.3% |
* forecast
Attractive yield
Shell has still been providing a pretty attractive yield, and its share price has held up well too. There was a dip in 2009, but not as deep as the FTSE 100 as a whole. And in the past five years, Shell shares are up 52% with the FTSE having only just managed to beat 40%.
The dividend is increasing quite nicely now and is edging ahead of inflation. And that’s what we really need if we’re investing for the very long term — a high yield today is no use in 20 years time if annual rises are eroded by inflation.
Exchange risk
But we do need to sound a note of caution here, as those figures above are in US cents — with the pound having appreciated against the dollar over the past year, that forecast 3.3% rise is likely to come in around zero in Sterling terms. But it does work both ways, as the pound had previously been slipping and earlier years will have been kinder to UK-based shareholders.
The future?
With Shell planning to increase its levels of asset disposals as it concentrates more on the higher-margin sections of the business, I do think there is scope for better dividend rises over the next few years.
In fact, at halfway time this year chief executive Ben van Beurden told “We are expecting some $7 – $8 billion of share buybacks for 2014 and 2015 combined […]. These expected buybacks and dividend distributions are expected to exceed $30 billion over the two-year period“, so Shell does appear to be focused on returning cash to shareholders.
