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Shell surprises investors with a historic decrease in dividend

English translation of an article published by the Dutch FT.

Shell surprises investors with a historic decrease in dividend

Bert van Dijk and Saskia Jonker

  • Shell is reducing the dividend due to challenging macroeconomic conditions.
  • Shell’s dividend has been under pressure for some time.
  • Due to sharply declining oil and gas prices and the drop in demand for oil products, net profit decreased 46% to $ 2.9 billion in the past quarter.

It took four board meetings, but then the time had come: oil and gas multinational Shell RDSA cut € 15.48-10.43% for the first time in 80 years in its dividend. “A difficult day for the company,” said Shell CEO Ben van Beurden. ‘No chairman of the board wants this on his track record, but it is wise to do’.

Shell reduces its quarterly dividend by 66% to $ 0.16 per share. It is the first time since World War II that Shell, one of the largest dividend payers in the world, is reducing the dividend. Shell paid $ 15 billion to shareholders last year.

Although the dividend has been under pressure for some time, news of the cut came as a surprise to many investors. The Shell share closed more than 10% lower, making it by far the largest fall in the AEX.

“Extremely challenging conditions”

Shell says it is taking the drastic step as macroeconomic conditions continue to deteriorate as a result of the corona outbreak and there is considerable uncertainty about the medium and long term.

Van Beurden speaks of ‘extremely challenging circumstances’ and in a telephone press conference was gloomy about a rapid recovery. “I don’t expect oil prices or demand for our products to recover in the medium term.” He even openly wonders whether oil demand will return to pre-pandemic levels.

“Not an easy decision”

And so, according to the company, it is ‘wise’ to significantly reduce the dividend. Until recently, such a cut seemed unthinkable, because keeping profit distribution up to date was a high priority for Shell. It also radiated confidence in the future.

But that confidence has ebbed away more and more recently, so the so hated cut had to be announced. “That was not an easy decision,” said Van Beurden. “We discussed four board meetings about it. This is a difficult day for the company. ”

Increase in climate ambitions

Looking at the uncertain future, the payment of the generous dividend would be too great an assessment of the financial resources, the board concluded. “It is not wise to borrow money to pay dividends,” says Van Beurden. Last year, Shell was unable to maintain sufficient funds to pay dividends, make investments and pay off its debt.

“If we hadn’t reduced the dividend, we wouldn’t have options to position the company for recovery and future growth.”

Shell is committed to transforming itself into an energy company with drastically reduced CO₂ emissions in the coming decades. The company even raised its climate ambitions two weeks ago.

Shell is the first to lower

By now saving $ 10 billion in dividend payments annually, Shell is also creating more room to invest in cleaner energy. The dividend reduction is not temporary, but according to analysts from investment bank RBC Capital the ‘new normal’.

Shell, which has higher climate ambitions than some of its industry peers, is the first of the big five oil multinationals (Shell, ExxonMobil, Chevron, Total and BP) to cut its dividend. BP maintained its dividend earlier this week, as did ExxonMobil. However, the Norwegian Equinor recently also lowered its dividend by two thirds.

Under pressure for some time

The dividend had been under pressure at Shell for some time. While dividend stocks like Shell are a critical part of the investment portfolio for many large pension funds, large investors are increasingly concerned about corporate viability.

Eumedion, the interest group of institutional investors, although the reduction is ‘wry’ for all investors, it understands that ‘the board should now prioritize financial prudence,’ director Rients Abma said in response.

The private investors association finds Shell’s decision “more than sensible in these uncertain times,” said VEB chairman Paul Koster. Shell has traditionally been a share that many private individuals own, precisely because of the stable, rising dividend. Koster understands that they are disappointed. “But it’s also of no use if the company has to borrow in a few months because it has now paid out in full.”

Profit almost halved

As a result of the sharp decline in oil and gas prices and the disappearance of demand for oil products, net profit, adjusted for exceptional items and at constant exchange rates, saw a sharp decline last quarter: by 46% to $ 2.9 billion. The company expects the malaise to continue for a while and will therefore reduce production this quarter.

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