Shell Shocked – An Oil Giant Cuts Its Dividend

Royal Dutch Shell did the unthinkable last week and cut its dividend. It is the first time it has done so since the second world war. Think about that for a minute. For a period of 75 years, Shell did not cut its dividend. This is remarkable considering Shells operates in a hugely cyclical industry.

During this period there has been multiple recessions, including the worst meltdown since the Great Depression, the dot-com bubble and the housing bubble, the Asian financial crises, multiple international wars, the 1973 oil crises, ballooning government deficits, exploding national debt, countless natural disasters, political earthquakes and a maelstrom of regulatory changes in the financial industry, and Royal Dutch Shell still managed to maintain its dividends during each of those years. This is truly amazing and testament to Shell and its management.


But this time seems to be different. For Shell to cut its dividend means that all is not well in the oil space. I fear that Shell sees things that others are currently not. I fear that they see demand for oil and gas not rising as quickly as what people might expect.


The coronavirus and the forced economic lockdowns have hit oil demand in a way previously unfathomable. A recent article by Bloomberg showed that energy demand has just dropped by the largest percentage since World War II (which was the last time Shell cut its dividend). The transport sector, which accounts for almost 60% of oil usage, it more or less paralysed. Oil used in industrial processes is also in the dumps.


This demand collapse is impacting both oil producers and refiners. Shell, as an integrated oil major, is both. Refiners often benefit from falling oil prices, because they generally see margins expand. That’s why an integrated oil company is usually more stable during the ups and downs of oil prices. Upstream (oil and gas production) and downstream (refining) generally perform out of phase with each other, which helps balance out the cycles.


But the current collapse is hitting both ends — oil demand and finished product demand. This creates one of the most challenging economic climates the integrated oil companies have faced — perhaps ever.


So what does it mean for my stake in Shell?


Shell was my second ever dividend stock purchase. And even with the recent share price falls, I have no regrets about my ownership stake in this company. In fact, Shell has been very kind to me. Over my four and a half year ownership period of the stock, my returns are in the double digits. This is why I recently renewed by commitment to Shell by buying 94 shares at a price of £11 each.


Sure the price may fall further as income focused funds sell shares in Shell as it no more meets there criteria. But this selling may create an opportunity to invest in the company at an even better valuation. And when this happens, I will be ready to pounce.

Even with the recent dividend cut, I still think Shell is company deserving of a place in an intergenerational portfolio. And I do believe oil will rebound eventually. And when it does so, they will be much less competition for Shell then there is today due to the smaller companies going bankrupt.