Over the past few decades, Royal Dutch Shell (LSE: RDSB) has earned itself a reputation for being the most reliable dividend stock in the FTSE 100.
The oil major has paid a dividend to investors every year since the end of the Second World War, and thanks to its reliability the company has earned almost legendary status among investors. The term “never sell Shell” is common around the City of London.
However, the winds of change are blowing against the company. Oil prices slumped in 2014 and have struggled to recover to previous levels. At the same time, the global shift away from fossil fuels towards renewable energy and cleaner alternatives is gaining traction.
The big question is, will these themes lead Shell to cut its 6% dividend?
Protecting the payout
It is no stranger to dividend cut rumours. When the price of oil started sliding in 2014 and the slump carried on into 2016, analysts believed a dividend reduction was inevitable. Management was able to maintain the payout by aggressively cutting costs and selling off non-core assets. These efforts helped profit margins recover and freed up cash to return to investors.
Going forward, the company wants to stick to its austerity era plan. Management will only commission deepwater oil projects that break even at $40 a barrel, which should enable the group to stay profitable in all but the most severe oil bear markets.
So, it looks as if the business should be able to weather low oil prices, although an extended period of prices below $40/bbl might cause problems. In reality, however, I think this is an improbable scenario.
Green growth
The shift away from fossil fuels to renewable energy is more worrying. Several countries around the world, including the UK, have stated that they will ban petrol and diesel cars by 2050, which will hit global demand for refined products. At the same time, investment in renewable energy technologies is exploding, curbing the need for fossil fuels in power generation.
For example, last year the capacity of renewable energy exceeded that of fossil fuels for the UK for the first time. Renewable energy now accounts for 30% of the total electricity produced in the UK.
While these are significant changes, in reality, I don’t think they will have much impact on companies like Shell in the short term. There is still a vast, and growing, demand for fossil fuels around the world and forecasts suggest demand is not going to peak for some time.
Nevertheless, if it wants to protect its dividend for the future, Shell needs to invest in green technology and renewable energy. The good news is that Shell has declared an ambition to double the amount it spends on green energy to £3.2bn a year. Although this is only a fraction of the group’s overall capital spending, it is a step in the right direction and should help the enterprise prepare for the future.
The bottom line
Considering all of the above, I don’t think the dividend is under immediate threat. However, risks to the payout are growing, and I don’t believe the distribution is as invulnerable as it has been in the past.
