Royal Dutch Shell - can you ignore a 6.5% (and growing) dividend?

Royal Dutch Shell ‘B’ (RDSB.L): Along with today’s half year results, to 30^th June 2015, the group has issued a ‘big picture’ update. In this they re-iterate that they are committed to paying a CY2015 dividend of $1.88 per share. The official sterling dividend rate will not be announced until early September, but at today’s spot rate of £:$1.56 that is 120.5p. On the back of today’s announcements the shares have rallied to 1840p, where the yield is 6.5%. Normally shares sporting such a high yield raise the question of whether it is sustainable, but in Royal Dutch’s case they are committing to paying “at least” $1.88 in CY2016. In addition they are looking to a $25bn share buy-back programme in 2017-20. All this raises the question of whether they can deliver on these commitments? Well with the oil price in turmoil they are fully part of the trend to slash away at operating costs. At the same time capex is being curtailed with this year seeing a greater than previously announced $7bn (or 20%) cut to $30bn, with a pro-forma BG/RDS forecast for CY2016 of $35bn. The proposed deal to acquire BG is steadily negotiating the regulatory hurdles towards completion in early 2016 and the enlarged group will have all the more asset disposals, cost efficiencies and capex rationalisation to harvest. They foresee synergies by 2018 of at least $2.5bn. The balance sheet is already strong with gearing at just 12.7%, slightly up from 12% at the year-end.

All this jam tomorrow makes today’s numbers a bit of a sideshow, but they beat consensus with second quarter earnings (on a current cost of supply basis) of $3.8bn, leaving the first half at $7.1bn, down 47%. On the same basis eps for the half were down by the same percentage at $1.12, with cashflow down 42%, but still a whopping $13.2bn. The group appears well placed to see out the current storms in the oil market and the BG deal could be a masterstroke of timing. The combined group would have plenty of self-help to go for and any end to the oil glut would give them a handsome tailwind. Any stock with a 6.5% yield that is forecast to increase its dividend (albeit with $ currency risk) must be in long term portfolios, unless you believe that the oil market is so wrecked that RDS will not be able to deliver on its commitments. (Neil Cumming^, 30^th July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower