Morningstar

Shell Cuts Dividend in Response to Market Uncertainty

Despite the dividend cut, we are keeping our fair value estimate.

Securities In This Article
Shell PLC ADR (Representing - Ordinary Shares)
(SHEL)

Shell’s RDS.A first-quarter adjusted earnings fell sharply to $3.0 billion from $5.4 billion the year before due to lower commodity prices and weaker refining and chemical margins. While the decline in earnings was expected, the accompanying cut to the dividend was not. Shell announced a first-quarter dividend of $0.16 compared with $0.47 for the fourth quarter, a 66% reduction. The announcement and magnitude came as a surprise, as we previously thought Shell’s ability to take on additional debt and reduce operating costs and capital spending would be sufficient to support the dividend and if not, it would return to a scrip debt as it has before. Additionally, peer BP, which has a higher debt load, maintained its dividend for the first quarter.

However, in announcing its decision, management cited unprecedented level of uncertainty given the fallout from the coronavirus and that it wanted a dividend that would be affordable in a wide range of scenarios and able to grow over time, suggesting the decision might be about more than just the current environment. The cut will save Shell about $10.5 billion per year, while in contrast a scrip option would have increased its total cash dividend outlay over time. Instead, the rebasing of the dividend now could ultimately afford Shell greater financial flexibility over the long term and allow for debt reduction and greater reinvestment. Additionally, it could tact more to a cash shareholder return program focused on repurchases as its U.S. peers do, which allows for more flexibility as well.

The dividend cut does not impact our fair value estimate or moat rating, leaving shares undervalued in our view. However, with a forward dividend yield of 3.8%, well below peers’, investors might look elsewhere in the sector to other integrated firms whose yield is higher and trade a similar discount.

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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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