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Why BP And Shell Have Decided To Maintain Dividends Amid Falling Crude Price

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Why BP Plc (ADR) And Royal Dutch Shell Have Decided To Maintain Dividends Amid Falling Crude Price

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Bidness Etc looks at why BP and Shell have announced to maintain dividends despite tumbling crude price and lower capital spending budgets

By: MICHEAL KAUFMANPublished: Feb 7, 2015 

Crude oil price is a major source of concern for energy companies, since it has tumbled over 50% during the last six months. Companies amid the low-price scenario are looking to maintain adequate liquidity. Shareholders are also concerned over the amount of dividends they are likely to receive in the current scenario.

Shares of BP plc (ADR) (NYSE:BP) since the last six months have fallen over 18%, while shares of Royal Dutch Shell plc (ADR) (NYSE:RDS.A) have plummeted 15%. Investors and shareholders are clearly concerned regarding the ability of the energy companies to pay consistent dividends during these troubled times and have caused the energy stocks to crash since the crude oil price collapsed.

However, investors can breathe a sigh of relief as both oil majors have announced that they would maintain dividends despite the tumbling crude oil price. According to the Guardian, BP had announced capital spending cuts of 10%. But the latest announcement by the company came on Tuesday, whereby the oil major indicated to reduce its capital spending by 20% and would compensate the cut by maintaining the dividend payments it had reintroduced last year.

Shell released fourth-quarter results for the fiscal year 2014 on January 29. The results were worse than the analysts had expected. Shell missed on the revenue and earnings estimates and indicated that it would reduce capital spending by over 15% this year.

Credit Suisse called BP’s decision to maintain dividends as more investor-friendly. Many brokers have given a Buy rating on the stock. According to the Financial Times, The Share Centre rates the stock a Buy along with 13 other brokers. 19 brokers have given the stock a Hold rating and only four brokers rate it a Sell.

Out of the 15 analysts who cover BP stock, six rate it a Buy and nine have given it a Hold rating. The 12-month average target price on the stock is $42.14.

On the other hand, 21 brokers rate Shell stock a Buy, and 16 have given it a Neutral rating. Out of the 16 analysts who cover Shell stock, seven rate it a Buy and eight have given it a Hold rating.

Analyst Adrian Lowcock heads the investing division at the Axa Self Investor. He indicated that the dividends of both the companies will fall below $2 and stand at $0.52 and $1.61, respectively, for BP and Shell. Dividends below $2 represent a sustainable dividend. He also indicated that the two stocks are the top dividend-paying stocks on the FTSE 100 and constitute 10% of UK’s overall dividends.

Mr. Lowcock also indicated that it would be difficult for energy companies to sustain dividends in the long run if the low-price scenario persists. The downstream sector, on the other hand, benefits from the lower price as the sector incurs lower costs of production. Certain funds, for instance JO Hambro Capital Management’s UK Equity Income Fund, have increased their exposure in oil industries. Investments in the sector would be cheaper now due to the falling oil price and could prove to be fruitful in the long run.

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