Shell’s (LSE: RDSB) Chief Executive Ben van Beurden shocked the market yesterday when he revealed that Shell’s dividend payments and even its very existence are under threat if the shift to renewables takes place too fast.
The group’s CEO made these comments at Shell’s annual meeting this week as 97% of the company’s shareholders voted to reject a resolution to invest profits from fossil fuels in becoming a renewable energy company. Speaking at the meeting, Ben van Beurden said: “We cannot [transition to renewables] overnight because it could mean the end of the company.”
These comments from Shell’s CEO shouldn’t necessarily be taken at face value but they do send a stark warning to shareholders.
As the world shifts towards renewable energy and becomes less dependent on oil, Shell is going to have to change with the times, and if the company doesn’t keep up, then Ben van Beurden’s message to shareholders will become more than just a warning.
What’s more, as the price of oil languishes, Shell is losing money on its upstream operations. The company lost just under $1.5bn during the first quarter as the cost of production far exceeded the cash generated from oil sales. And if this trend continues, it could end up being a bigger problem for Shell than the renewable energy movement.
The oil market is already oversupplied, and Saudi Arabia seems happy to continue to pump crude at an ever increasing pace without any consideration to the price. This is probably Shell’s most pressing issue at present, and the longer Saudi keeps following this strategy, the more important it will be for Shell to expand into other areas of business, which will most likely be renewables. In other words, Shell’s hand could be forced, bad news for the company’s long-term growth and dividend policy, if Ben van Beurden is to believe.
So, what should investors do following this dire warning? Well, Shell is already investing in its renewable energy arm, but the transition will take time for the company to complete. If the company’s hand is forced, then it might be time to sell Shell and find another attractive income investment elsewhere.
Still, for the time being Shell is one of the best dividend stocks around. The company’s shares currently support a dividend yield of 7.7%, and Shell hasn’t cut or missed its payout since the Second World War. The company’s shares trade at a forward P/E of 22.7, which looks relatively expensive when you consider the fact that City analysts believe earnings per share will fall by 35% this year as low oil prices continue to bite. That said, those analysts are currently predicting earnings per share growth of 76% for 2017 as oil prices move steadily higher.
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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.