Shell slashes dividend by more than 60% – end of oil?

Written by Good Money Girl on 30th Apr 2020

Shell, the UK-listed oil giant, has cut its dividend by more than 60 per cent. It’s the first time the company has cut its regular payment to investors since the Second World War.

The coronavirus crisis has led to a sudden drop in demand for oil, and also the price of oil, which has sent financial markets into a headspin.

Why is it significant for me that Shell has cut the dividend?

A dividend is a regular payment to investors as a kind of ‘thank you’ for remaining as shareholders.

Oil companies like Shell have, over the years, been mainstays of pension funds – which are the funds that our (probably your) life savings pots are invested in.

One of the main reasons pension funds have traditionally always invested in oil companies is that they pay generous dividends, relative to other listed companies.

As the fuel behind the engine of the global economy, they have always been considered relatively ‘safe’ long term bets.

Today’s cut to Shell’s dividend could be viewed as a simple and efficient response to the reduction in demand for oil as a result of the coronavirus crisis.

Alternatively, it could be viewed as a sign of the long-term structural decline in a sector that has no place in the world after the energy transition to renewables.

Government figures published today also provided further evidence of a shift towards renewable energy, showing a drop in coal use and a record rise in renewable energy generation in the first quarter of 2020.

Many commentators are viewing today’s cut as a sign of a long-term decline in the demand for oil, rather than simply a response to the immediate problems caused by the coronavirus crisis.

Charlie Kronick, oil finance analyst for Greenpeace UK, said:“Shell’s decision to slash its dividend for the first time since the Second World War is just the latest sign of turmoil in the oil industry. The company hopes that oil demand will recover, but in a world facing a climate emergency that’s not an option.

“To avoid catastrophic climate change – as well as to have a chance to be part of the zero carbon future – Shell needs to begin now to align spending with its completely undefined ambition to achieve net zero carbon emissions by 2050. Shareholders’ interests will be best protected by shoring up Shell’s future in renewables, rather than doubling down on the destructive and volatile oil industry.”

In our opinion, this is the start of a divergence between the old economy and the new economy.

Storm Uru, manager of the Liontrust Global Dividend Fund, said: “Shell’s announcement today will send shockwaves through the income investing market. The cut of over 60% means the company will trade on a new dividend yield of 4% down from 10%. CEO Ben van Beurden highlighted that this new dividend pay-out rate is sustainable and reflects the companies uncertain outlook combined with concerns over the viability of some of their assets. The concerning outcome of this cut is the signal this provides about the future value of the company. When the CEO cites “demand destruction”, “future value of the company” and “viability of our assets” it makes me very concerned about a range of over-leveraged companies with no competitive advantage.

“Particularly when you consider the impact this crisis will have on the old economy, as this economic crisis encourages us to adopt new technologies and shifts capital investment away from traditional avenues.  Compelling evidence from past recessions shows those stocks trading on high dividend yields are more likely to cut their dividend compared to all others, so this action should not come as a surprise with more high dividend payers still yet to cut. Contrast this announcement with Microsoft outstanding earnings results last night – Microsoft’s cloud offering, Azure, grew 59% YoY and the company exited Q1 with almost $140bn cash on its balance sheet (growing its dividend 10% in 2020).”

Mr Uru continued: “In our opinion, this is the start of a divergence between the old economy and the new economy. It’s not about who can make it through this economic environment, because if you hop into this crisis on one leg due to debt levels or losing out to new competitors – prospects on the other side are not bright. This year is lost for many traditional dividend payers but what about if dividend deferrals or cancellation persist longer than just 2020. We believe the stronger in – the stronger out will lead to a new cohort of dividend aristocrats once we exit this crisis.”

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