Good Times Ahead For Shell
The slump in commodity prices over the last three years has severely dented the profitability and cash flows of oil and gas companies, making it difficult for them to sustain their high dividend outflows. Consequently, investors not only suffered heavy losses due to the plunge in energy stock prices, they also had to forego a regular source of income in the form of dividends. Royal Dutch Shell (NYSE:RDS.A), the European integrated energy company, was one such company that had to restrict its dividend growth in the last three years in order to deal with the commodity downturn. The company had launched a scrip dividend program in early 2015, wherein cash dividends were settled through a share-based alternative. This move was indicative of the strain that the low commodity prices was having on the company and its ability to meet its dividend payments.
See Our Complete Analysis On Royal Dutch Shell Here
However, earlier this week, Shell announced the cancellation of its scrip dividend program and reinstated cash dividend with effect from the declaration of the interim dividend for the fourth quarter of 2017 in February 2018((Shell Announces Cancellation of Scrip Dividend Program, 28th November 2017, www.shell.com)). This comes as a great news for the shareholders, who will receive their complete dividend payments in cash from the company going forward, unlike previously when they had an option to receive their dividend in cash or shares. Along with the scrapping of the scrip dividend, Shell also highlighted that it now estimates its annual organic free cash flow to be around $25-$30 billion by 2020, assuming Brent crude oil prices stay at $60 per barrel. The new free cash flow expectation is almost $5 billion higher than the company’s outlook back in June 2016.
The two announcements together are indicative of the fact that Shell’s strategy to reshape its operations, initiated in 2016, is finally bearing fruit. The company’s efforts to reduce its operating costs, coupled with the start-up of its new and higher-margin projects, is likely to boost its cash flow position in the next few years. Besides, the company plans to restrict its capital expenditure over the remaining years of this decade, depending upon the recovery in commodity prices. Thus, the company is likely to have sufficient cash flows to cover its cash dividends in the coming quarters.
The move also hints at Shell’s willingness to share its growth and higher cash flows with its shareholders in the form of cash dividends. This is likely to reinforce investor confidence in the company and its stock. In fact, the company’s stock price rose more than 3% post this announcement. Thus, we have a price estimate of $63 per share for the company, which is largely in line with its current market price.
Shell’s Dividend Could Rise In 2018
In the chart above, we present our base case assumption (gray bars) for Shell’s annual dividend payment for the next two years. Based on our estimates, the company will continue to pay an annual dividend of $3.76 per ADR in 2017 and 2018. However, if the company is able to generate higher free cash flows as expected, coupled with a strong rebound in commodity markets, there is a possibility (shown as blue bars) that the company might increase its dividend payments by around 2% in 2018. Feel free to create your own scenarios for Shell’s future dividend and visualize its impact on its stock price using our interactive platform here.
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