Can Royal Dutch Shell plc afford to pay today’s dividend?

Royal Dutch Shell plc (LON: RDSB) has a dividend yield of 6.4% at present. But is the current dividend payout sustainable?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shareholders in Royal Dutch Shell (LSE: RDSB) are probably aware that the oil giant pays its quarterly dividend today. Investors will receive 47 cents per share, which, if extrapolated out for the full year, equates to a mighty dividend yield of 6.4% at the current exchange rate.

That high dividend yield no doubt sounds attractive in the current low interest rate environment, however, whenever a company’s yield is significantly above the market average, it’s important to question whether the dividend payout is actually sustainable.

High yields can signal trouble

When a company has a dividend yield that is significantly higher than the market average, it can be a signal that the market is concerned a dividend cut may be on the horizon. The high yield is the result of many investors having already exited the stock, pushing the share price down and the dividend yield up. If the company does go on to slash its dividend, further share price declines are to be expected, and investors may be left with the nasty combination of a lower dividend payout, as well as capital losses.

Is Shell’s dividend sustainable?

So can Shell afford to pay today’s dividend of 47 cents per share and a dividend of $1.88 for the full year?

It’s no secret that lower oil prices in the last three years have caused carnage within the oil sector. When oil was trading at the $100 mark three years ago, it was easy for companies like Shell to generate sizeable profits. However, with the oil price at $50 today, and showing few signs of a sustainable move higher, it’s a different story.

For example, in FY2013 and FY2014, Shell generated earnings per share of $2.66 and $2.36 respectively. That was comfortably enough to pay its dividend of $1.80 and $1.88 during those years. However, in FY2015 and FY2016, Shell generated earnings per share of just 31 cents and 58 cents, meaning that the dividends of $1.88 the company paid out in both years, far exceeded the company’s earnings. That’s not sustainable in the long term.

Cash flow 

Having said that, after examining the last two quarter’s results, the picture does look to be improving a little, as the company has taken measures to improve capital efficiency and cost control.

In the first quarter of FY2017, Shell generated operating cash flow of $9.5bn, and free cash flow of $5.2bn. This enabled the company to reduce debt and cover the cash dividend payments of $3.9bn. In the second quarter, Shell generated operating cash flow of $11.3bn, and free cash flow of $12.2bn, once again covering the dividend payment of $3.9bn.

These figures suggest that to me that if oil prices stay at current levels, Shell should be able to continue to pay its current level of dividend going forward.

Consensus dividend forecasts

Nonetheless, with consensus dividend estimates for FY2017 and FY2018 currently at $1.84 and $1.83 respectively, it suggests that some analysts covering the stock believe the company will cut its dividend in the near future. Investors should be aware of this before buying for the formidable dividend yield.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »