Shell Restores Cash Dividend

FTSE 100 dividend mainstay Royal Dutch Shell has cheered investors by restoring its full-year cash dividend and announcing improved cash flow

Allen Good 29 November, 2017 | 10:58AM
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Royal Dutch Shell (RDSB) shares rose nearly 4% on Tuesday as the oil giant restored its full-year cash dividend at its annual management day. The decision came earlier than Morningstar equity analysts expected, but is not entirely surprising. Shell has generated sufficient free cash flow during the past four quarters to cover a full cash dividend, while oil has averaged $52 a barrel. The company is scrapping its scrip dividend scheme, where investors receive dividends in shares or cash, a measure put in place during the years when oil prices slumped.

Along with the dividend announcement, Shell investors were cheered by news that it had increased its annual organic free cash flow target by $5 billion to $25 billion-$30 billion for 2019-21 and reiterated its plans to repurchase $25 billion of shares during the next three years. The increase in free cash flow guidance is a function of greater confidence around its cost-cutting efforts, reduced operating cost base and strong project delivery.

The increase in free cash flow and safety of the dividend relative to its yield were among the key tenets of our thesis on Shell. While the market has begun to recognise this potential, we still see shares trading at a discount. Our fair value estimate of £27.50 – against a current price of just over £24 a share – is unchanged. The fair value estimate was increased from £25.35 to £27.50 at the beginning of November. Shell has a four-star Morningstar rating, which means analysts consider it to be trading at a discount.

Outside of the dividend announcement and updated guidance, the update largely served as a reminder of Shell’s strategy, which is unchanged. More mature businesses including refining and marketing, integrated gas, and conventional production will serve as the cash engines to fund dividends. Deepwater and chemicals will provide growth, with the former eventually becoming a cash engine, and with new energies and unconventional eventually serving as growth drivers post-2020.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Royal Dutch Shell PLC B1,795.00 GBX1.93Rating

About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.