
Summary
- Shell is funding its dividend and capital expense programs through a combination of debt and asset sales.
- Those assets are operating, economic assets that provide long-term value to the company under its assumptions.
- Shell has one year of leeway at current prices to fund its dividend after that rising debt will put too much pressure on the companies balance sheet.
- Since I have a negative outlook on prices till at least 2018, I expect a Shell dividend cut in the first half of 2017.
- Adding to the long list of resource companies with debt-funded dividends, we have Royal Dutch Shell (RDS.A, RDS.B). With a current yield of nearly 8%, and assuming you knew nothing about oil and gas, you could reasonably conclude this company is in peak operating condition. Unfortunately for investors, that story would be far from true.
Capital Expense – Free Cash Gap Growing
Many Shell investors focus on the stability of the dividend as a hallmark of the stock. Those investors are seemingly immune to what the balance sheet, cash flow statement tell us. As the company has pushed towards gas and is being pushed by its investors towards renewables, the capital expense bills have piled up. Throughout the oil downturn, Shell has hardly reduced capital expense in line with free cash flow – a result of long-term project planning that cannot be reined in. read more
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