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Will Royal Dutch Shell Eliminate Its Dividend This Year?

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Screen Shot 2015-11-20 at 08.55.47Extracts from an article by Lior Cohen: JAN 14, 2016

Shell’s stock shed 10% off its value over the last month, as the price of oil dwindled.

Following this fall, the dividend yield is currently at 9.4% – a historic level.

Some investors think that because the company paid and raised its dividend since WW2, it means it won’t deviate at this stage. But let’s not forget that times are changing. And if Shell were to face say a Gulf of Mexico oil spill as BP (NYSE:BP) encountered back in 2010, you can bet the dividend will be eliminated in a heartbeat – especially in times of low oil prices. But even without a major oil spill, the current oil price environment stresses Shell’s cash reserves.

With oil prices at the low $30s, Shell will have to cut down capital spending and reevaluate its operations. It also recorded big impairment charges with respect to its projects in Alaska and Alberta, Canada. And the ongoing low oil prices are likely to result in additional impairment provisions that will only intensify the growing debt burden. Therefore, the company is likely to present in the next earnings report revised down guidance for its 2016 capex and plans to cut down production.

Given the current weakness of oil prices, a reduction in the dividend could create anxiety among investors to drop the stock, which will only push further down its price.

But if oil prices maintain their low levels, we are likely to see a shift in the management’s tone as the year winds down. And perhaps by the end of the year the company may eventually start talking about reducing its dividend.

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