Today I am looking at why dividends at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) may come under pressure.
Payouts expected to rise through 2015
Income investors have long flocked to oil giant Royal Dutch Shell even in spite of persistent earnings troubles, as its ability to generate swathes of cash have enabled it to offer market-smashing dividend yields.
A backdrop of severe earnings pressure after the 2008/2009 financial crisis crushed oil prices and put paid to the firm’s progressive dividend policy. But a strengthening balance sheet, facilitated by vast asset sales, has enabled Shell to get payments moving higher again, a trend that City analysts expect to continue during the medium term at least.
Indeed, the black gold colossus is anticipated to fork out a dividend of 184.6 US cents per share this year, up 3% from 2013 levels. And a further 3% hike, to 190.7 cents, is anticipated for the following 12-month period.
Consequently Shell continues to produce blue-chip busting yields, with these forecasts creating monster yields of 5.1% and 5.2% for 2014 and 2015 respectively. By comparison the FTSE 100 boasts a forward average of 3.4%, while Shell also trashes a corresponding reading of 4.3% for the complete oil and gas producers sector.
… but could long-term payout growth come under pressure?
Current forecasts indicate that earnings growth at Shell looks set to remain elusive — a 39% improvement in 2014, although no doubt impressive, is expected to be followed with a 2% dip next year. Still, based on these projections projected dividends at the fossil fuel specialists are covered 2 times by earnings, bang on the security watermark.
And Shell last week confirmed its confidence in fulfilling its $30bn cash return goal– $22bn in dividends and $7bn to $8bn in share buybacks — during the current year. Elsewhere, the company also stated it expects to raise $15bn in asset sales in 2014, in line with its target.
Still, I believe that the effect of these heavy disposals and reduced capital expenditure — although good for its payout prospects in the near term — could severely dent the company’s ability to generate chunky earnings growth in the future, and with it further dividend growth.
The effect of asset sales are expected to drive group production between 100,000 and 140,000 barrels per day lower in 2015, Investec says, while a smaller asset base could exacerbate the firm’s output profile should exploration and production work disappoint.
With Shell also facing the prospect of collapsing oil prices as swathes of new supply hit the market — Goldman Sachs said just last week that it expects Brent to collapse below $80 next year — Shell may struggle to maintain its position as a go-to dividend stock in the long term.
