Royal Dutch Shell’s (RDS.A, RDS.B) management has made a big announcement about the Royal Dutch Shell dividend. We believe that this is an incredible sign of strength for the company. What are we talking about here, and what is going on with the Royal Dutch Shell dividend ?
Although the Royal Dutch Shell dividend per share was not increased, a significant change has definitely occurred that you need to be aware.
As part of management’s measures to get the company through the difficult times that followed the decline of energy prices, shareholders were given the option to have their Royal Dutch Shell dividend paid out in shares instead of cash.
Why was this a benefit?
Well by doing this, management did not have to cut the Royal Dutch Shell dividend while it spared cash when it needed this most. This scrip dividend policy was introduced in 2015 after the severe downfall of energy prices.
Over the past twelve months, a quarter of the dividend payout consisted of the scrip dividend.
The Royal Dutch Shell dividend program had a dilutive effect on Shell’s shares which was not a very welcome development for shareholders. To offset this dilution, Shell has also announced a share buyback program.
The company expects to spend a total of $25 billion on these buybacks through 2020.
We also believe that the Royal Dutch Shell dividend is safe. Why?
First the company is slashing costs everywhere. We are long past cutting the fat. Now the company is being surgical. And it must continue to do it effectively. The fact that the company is earnings-positive is impressive in and of itself.
The company is doing everything. Massive job cuts. Exploration spending reductions. We have also said that we think management will borrow funds until bankruptcy court to pay its dividend, waiting for the eventual rebound. Now it does not need tom as chas flows are sufficient once again.
As far as oil, it will rebound. Not today, not tomorrow. It might not be this year, or next, but it will. As far as near-term performance, it is going to be rough, but there are signs of hope. But what is underappreciated is the abundance of news of the company selling off assets to raise cash, all of which are dividend-protective. Looking ahead, we like shares here.
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