Making the first dividend cut at Royal Dutch Shell (LSE: RDSB) for more than 70 years probably wasn’t easy for CEO Ben van Beurden. But the Shell share price is only down by 6%, as I write, suggesting many investors are supporting this decision.
Although I’m a little surprised by today’s news, I think Shell’s dividend cut is the right decision. Here’s why.
Cut once, cut deep
Van Beurden has been careful to cut deep. He won’t want to repeat this. Shell’s quarterly dividend has been cut by 66% to $0.16 per share. My sums suggest this should provide a yield of about 3.8%, with Shell’s share price at the last-seen level of 1,356p.
Until today, Shell was the biggest dividend payer in the FTSE 100, returning about $15bn of cash per year to shareholders. However, the price of a barrel of Brent Crude oil has fallen by more than 60% to around $25 so far this year. Demand for oil, fuels and chemicals have also slumped as the world has gone into lockdown.
Against this backdrop, Shell says the old dividend was “not prudent.” I’d have to agree. Today’s decision will reduce the annual cash cost of Shell’s payout to around $5bn. This looks much more sustainable to me.
This cut should support the Shell share price
As a Shell shareholder, I’m disappointed to be losing a big chunk of my dividend income. But there’s a part of me that says this cut is the right decision at the right time.
The dividend was already expensive before the coronavirus pandemic. If the payout had been left unchanged this year, I think the company would have needed to use borrowed cash for the dividend. This isn’t something I like to see, even though Shell could have managed it without too much risk.
I think cutting now should support the Shell share price over the longer term. When the oil market stabilises, I think it should speed up debt reduction and boost profits, paving the way for a return to dividend growth.
Dividend cut could help cut emissions
Shell plans to reduce its net carbon footprint to zero by 2050. Alongside this, the company wants to reduce the net carbon footprint of the energy products it sells by 65% by 2050. To achieve this, Shell will almost certainly need to invest much more in renewable energy projects. These tend to have slightly lower profit margins than oil and gas.
I think that cutting the dividend should support this evolution and may even make it more successful.
I like the Shell share price
If you want exposure to oil in your portfolio but are worried about climate change, I think Shell could now be the best choice in the FTSE 100.
The Shell share price is up by 50% from its March lows of under 900p. This suggests to me the market shares my view that Shell will be able to evolve from a pure oil and gas business into a more sustainable energy business.
I’m happy to see the firm’s management looking ahead and making tough decisions. I plan to continue holding my Shell shares and would rate the stock as a long-term buy.
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Roland Head owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. 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.