Shell cuts dividend for first time in 80 years as profit plunges

The Anglo-Dutch company cuts its first quarter dividend by 66% to 16 cents a share from 47 cents in the previous quarter, the first cut since the second world war in what it described as a "reset" of policy, indicating the move would not be temporary. It also suspended its share buyback programme.

"Given the risk of a prolonged period of economic uncertainty, weaker commodity prices, higher volatility and uncertain demand outlook, the board believes that maintaining the current level of shareholder distributions is not prudent," said chairman Chad Holliday.

Net income attributable to shareholders on a current cost of supplies (CCS) basis excluding identified items, used as gauge of net profit, plunged 46% year on year to $2.8bn as prices and demand slumped due to the Covid-19 pandemic.

"Given the continued deterioration in the macroeconomic outlook and the significant mid and long-term uncertainty, we are taking further prudent steps to bolster our resilience, underpin the strength of our balance sheet and support the long-term value creation of Shell," chief executive Ben van Beurden said in a statement on Thursday.

Capital expenditure would fall to $20bn or less this year, from initial plans for $25bn, in response to the pandemic, while operating costs were lowered by $3bn to $4bn.

Second quarter oil and gas production was forecast to be 1.75m - 2.25m barrels of oil equivalent per day from 2.7m in the first quarter.

Upstream earnings from oil exploration and production dived 82%, while gas earnings were 17% lower. Oil products and chemicals also felt the pandemic's effect.

THE DIVIDEND DILEMMA

Oil companies have clung on to dividend payouts despite plummeting demand as government lockdowns have resulted in planes sitting on tarmacs around the world and fewer journeys by car. The issue poses a dilemma for shareholders given Shell returned a massive $15bn last year, but with oil prices at rock bottom the need to conserve cash will challenge the sacred cow of yields on investments.

Sector peer BP this week maintained a payout of 63 cents a share, although profits there slumped 67% year on year, while Norway's Equinor was the first large company in the sector to make a cut, reducing its first-quarter dividend last week by two-thirds.

“Shell’s actions will affect so many people who are trying to earn a good return on their hard-earned savings. Approximately 160 retail funds and investment trusts in the UK have Shell as one of their top holdings, and many more overseas funds will hold the stock. There are also many pension funds on top who invest in the oil producer," said Russ Mould, investment director at financial platform AJ Bell.

“Pensioners have relied on names such as Shell for a very long time in order to help pay the bills during retirement. They will be particularly devastated at the news that dividend cheques will be significantly smaller."

The May contract for West Texas Intermediate fell below zero to trade in negative territory for the first time in history last week as producers paid to have the product stored due to massive oversupply. The commodity was selling at $60 a barrel at the start of the year.

On Thursday, the June contract of WTI traded at $17.20 per barrel, more than 14% higher for the session, while international benchmark Brent crude stood at $24.75, up around 10%.

Hargreaves Lansdown analyst Nicholas Hyett said that while the dividend cut was "very unwelcome news for income investors... it may be better news for the long-term health of the business".

"The need to service a cash hungry dividend has seen future investment sacrificed and assets sold. Essentially both Shell and BP have been slowly digesting themselves to keep the dividend ticking over. Removing that pressure allows the group to focus on the future and also secures the future of recently announced renewable energy investments," Hyett said.

"That being said these are not times for complacency. Demand disruption is likely to affect the group’s downstream and liquid natural gas businesses as well as oil and with prices this low protecting cash flow is key.”

AJ Bell's Mould said Equinor had "set the tone for the oil sector" and Shell’s actions "could lead to BP potentially reassessing its position in the near future".