The Motley Fool

Can Royal Dutch Shell plc afford to pay today’s dividend?

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.

Shareholders in Royal Dutch Shell (LSE: RDSB) are probably aware that the oil giant pays its quarterly dividend today. Investors will receive 47 cents per share, which, if extrapolated out for the full year, equates to a mighty dividend yield of 6.4% at the current exchange rate.

That high dividend yield no doubt sounds attractive in the current low interest rate environment, however, whenever a company’s yield is significantly above the market average, it’s important to question whether the dividend payout is actually sustainable.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

High yields can signal trouble

When a company has a dividend yield that is significantly higher than the market average, it can be a signal that the market is concerned a dividend cut may be on the horizon. The high yield is the result of many investors having already exited the stock, pushing the share price down and the dividend yield up. If the company does go on to slash its dividend, further share price declines are to be expected, and investors may be left with the nasty combination of a lower dividend payout, as well as capital losses.

Is Shell’s dividend sustainable?

So can Shell afford to pay today’s dividend of 47 cents per share and a dividend of $1.88 for the full year?

It’s no secret that lower oil prices in the last three years have caused carnage within the oil sector. When oil was trading at the $100 mark three years ago, it was easy for companies like Shell to generate sizeable profits. However, with the oil price at $50 today, and showing few signs of a sustainable move higher, it’s a different story.

For example, in FY2013 and FY2014, Shell generated earnings per share of $2.66 and $2.36 respectively. That was comfortably enough to pay its dividend of $1.80 and $1.88 during those years. However, in FY2015 and FY2016, Shell generated earnings per share of just 31 cents and 58 cents, meaning that the dividends of $1.88 the company paid out in both years, far exceeded the company’s earnings. That’s not sustainable in the long term.

Cash flow 

Having said that, after examining the last two quarter’s results, the picture does look to be improving a little, as the company has taken measures to improve capital efficiency and cost control.

In the first quarter of FY2017, Shell generated operating cash flow of $9.5bn, and free cash flow of $5.2bn. This enabled the company to reduce debt and cover the cash dividend payments of $3.9bn. In the second quarter, Shell generated operating cash flow of $11.3bn, and free cash flow of $12.2bn, once again covering the dividend payment of $3.9bn.

These figures suggest that to me that if oil prices stay at current levels, Shell should be able to continue to pay its current level of dividend going forward.

Consensus dividend forecasts

Nonetheless, with consensus dividend estimates for FY2017 and FY2018 currently at $1.84 and $1.83 respectively, it suggests that some analysts covering the stock believe the company will cut its dividend in the near future. Investors should be aware of this before buying for the formidable dividend yield.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Edward Sheldon owns shares in Royal Dutch Shell. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.