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Can Royal Dutch Shell Sustain Its High Dividends?

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Screen Shot 2015-09-17 at 07.55.40Trefis Team, CONTRIBUTOR: OCT 7, 2015

Royal Dutch Shell‘s dividend yield has reached a high of over 8%, given that its stock price fell by almost 18% in the last three months. The company has committed to paying its current dividend for the current financial year despite the pressure on its net income. However, it is now uncertain whether the company will be able to sustain this dividend in the future. The market seems bearish on Shell’s growth prospects.Our current price estimate for Shell stands at around 30% above the market price. In our bear case scenario, our price estimate faces a 20% downside, based on a reduced forecast for global crude oil prices, Shell’s exploration success, and downstream EBITDA margins. However, we remain optimistic on Shell, given its long standing history of dividend payments, we believe that Shell will not initiate a dividend cut.

See Our Complete Analysis for Royal Dutch Shell Plc.

Dividend Per Share Is Increasing Despite Declining EPS

Below is a quick snapshot of the company’s dividend history:

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A steady increase in dividend per share and a significant drop in the EPS brought the dividend pay-out ratio to 80% in 2014. This implies that the company is using most of its net income to pay dividends, thus putting pressure on its internal reserves.

The high dividend pay-out seems to be getting offset by low capital expenditure. Over the past three years, Shell’s capital expenditure has been reduced from 223% of D&A to only 130% of D&A. Capital expenditure as a percentage of revenue ranged between 7-9% in these three years.

If there is further decline in the company’s EPS, the pay-out ratio would be too high to sustain and will put a strain on liquidity. The company would then have to depend on free cash flow or borrowings to fund capex requirements.

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