The collapse in the oil price has given Shell the perfect opportunity to do something it’s been wanting to do for years.
Cutting the dividend for the first time in 80 years will give the company some much-needed wiggle room. Shell’s debt has ballooned from $1bn in 2005 to $73bn on 30 April. During that same period, it is paid out $153bn in dividends and spent $48bn buying back its own shares. That could not go on.
Also, it is in the process of trying to turn itself away from being thought of as an oil and gas company into an environmentally-conscious energy company.
It may be painful for pension funds, but this moment gives the company the cover it needs to change direction. BP may be kicking itself it didn’t do the same earlier this week.
Russ Mould, investment director at AJ Bell, said: “Shell’s decision to reduce its dividend is devastating to investors across the country, as so many people own its shares directly or through their pension as an important source of income.
“Investors risk putting money into the markets in order to stand a chance of achieving a better return than cash in the bank. While rates on cash savings accounts have been drifting down for a while, investment dividends were widely considered to be much more reliable.
“Sadly that is no longer the case, given how more than 300 companies on the UK stock market have this year said they won’t be paying dividends for the time being or paying a much lower level than before. This figure includes 41 companies in the FTSE 100.”
David Barclay, senior investment manager at Brewin Dolphin, said Shell’s move reflected “the unprecedented economic impact of Covid-19”, but was more sanguine about the long-term effects.
“On the face of it, the dividend cut and cancellation of share buybacks may be seen by some shareholders as a negative move in the short term.
“However, looking further ahead it could well prove to be the right step, as Shell looks to strengthen its financial position and cut costs during a very difficult time.”
Source: bbc.com
