Will Royal Dutch Shell Plc raise its dividend in 2018?

Does improving free cash flow mean dividend growth is just around the corner for Royal Dutch Shell plc (LON:RDSB)?

| More on:

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.

Following Royal Dutch Shell’s (LSE: RDSB) announcement on restoring its all-cash dividend on Tuesday, is dividend growth on the cards for 2018?

Free cash flow

Due to improving free cash flow, Shell said it would cancel its scrip dividend programme with effect from its 2017 fourth quarter payout, and announced plans for $25bn in share buybacks through to 2020.

The company gave shareholders the option of receiving a dividend in the form of newly-issued shares, known as a scrip dividend, in 2015 after the slump in oil prices. It was a move to increase its financial flexibility as cash generated from its operations then dried up. But now that free cash flow has improved substantially from its lows in 2015, it no longer made sense to issue new shares in lieu of cash dividends, as increasing its share count would eat into its earnings per share.

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

Following a major overhaul to costs and recent changes to adapt to a $50+ per barrel oil price environment, Shell has seen a dramatic reversal in its free cash flows. In the first nine months of 2017, free cash flow rose to $21bn (from a negative $16bn a year ago), significantly more than the $15bn required to pay an all-cash dividend.

And going forward, it expects further improvements, with its guidance for free cash flow of between $25bn and $30bn by 2020 with oil at $60 a barrel, up from its earlier target of between $20bn and $25bn.

Oil price recovery

This all sounds great to me, but a sustainable expansion in free cash flow is predicated on stable downstream margins and oil prices staying roughly where they are. Shell has certainly made significant progress in lifting its returns on capital employed, but there are many factors which are outside of its control.

The global oil outlook is very uncertain and oil prices may struggle to stay above $60 per barrel for long. What’s more, downstream margins are likely to remain under pressure, especially in Europe to which Shell has the most exposure.

Still, given the progress already made, I reckon the odds of a return to dividend growth next year are close to 50:50.

BP’s turn

Investors are keenly watching to see when BP (LSE: BP) would do the same and return to an all-cash dividend.

Earlier this month, the company restarted share buybacks to ease the dilution effects of its own scrip dividend. Some analysts see this as a sign that BP could be due to cancel its scrip dividend programme soon, but there’s been no announcement as yet.

Like Shell, BP’s free cash flow has also improved substantially, with underlying operating cash flow in first nine months exceeding its organic capital expenditure and its full dividend requirements. With an all-cash dividend, the oil major needed a Brent oil price of just $49 a barrel to balance organic cash flows in the period.

However, BP needs to be more cautious as its Gulf of Mexico oil spill payments continue to be a drag on its performance. The company also has a slightly higher level of indebtedness, with a net gearing ratio of 28.4%, compared to Shell’s 25.4%.

That said, the company shouldn’t be too far behind Shell in cancelling its own scrip dividend programme.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended BP and 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

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »