Does sub-$50 oil mean Royal Dutch Shell plc’s dividend will be cut?

Is Royal Dutch Shell plc’s (LON: RDSB) dividend still safe?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At the end of last year, when it looked as if OPEC was making a concerted effort to rein-in oil market oversupply, shares in Royal Dutch Shell (LSE: RDSB) charged to a 52-week high of just under 2,400p. Unfortunately, this rally didn’t last long. By the end of the first quarter, the shares had fallen by nearly 10% and have continued to slide as worries about a new oil glut have continued to grow.

The falling oil price has reignited the argument about the sustainability of Shell’s dividend payout. This debate raged last year among analysts, but management remained committed to the payout, and the company gained some relief when it issued its first-quarter results. Indeed, for Q1 2017, the company produced a profit of $3.8bn on a current cost of supply basis. Group gearing fell to 27.2% from 28% in the quarter before the receipt of about $15bn of proceeds from asset sales, which were not completed at the time the results were issued. 

Falling earnings 

Q1 results convinced investors that Shell’s dividend was secure once again, but in the months following, the price of oil has dropped from an average of $54.61 in the first quarter to $45.33 at the time of writing. 

According to Shell’s Q1 results presentation, a plus or minus $10 per barrel move in the price of oil impacts group earnings by plus or minus $5bn. This indicates that after the recent move in the oil price, Shell could have returned to a lossmaking position.

Abandon ship

Does this mean it’s time to abandon ship in a world of sub-$50 oil? The answer to this question ultimately depends on your outlook for the oil price, but based on Shell’s Q1 performance, I wouldn’t want to make any sudden movements. 

The quarter showed that when oil prices move in Shell’s favour, even by only a few dollars, the company is hugely profitable. Further, management hasn’t yet finished restructuring the group, lowering costs and selling off non-core assets, and further action on this front will only improve the company’s profit margins. 

Shell has demonstrated over the past year that the company can adapt to a world where the price of oil trades below $100 a barrel, and there’s nothing to stop the company adjusting to a lower hurdle. If oil prices never go above $50 again, the company will shape itself to fit this environment. Debt reduction, asset sales, and cost cuts are likely to come before the dividend is reduced, which is great news for investors.

Hold on 

With this being the case, I believe that Shell will remain a FTSE 100 dividend champion for the foreseeable future and income investors can rely on the company’s dividend payout to remain at its current level. After recent declines, shares in Shell currently support a dividend yield of 7.1%, offering the sort of income that’s almost impossible to find elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »