Skip to Content
Stock Analyst Update

Shell Cuts Dividend in Response to Market Uncertainty

Despite the dividend cut, we are keeping our fair value estimate.

Mentioned:

Shell’s (RDS.A) first-quarter adjusted earnings fell sharply to $3.0 billion from $5.4 billion the year before due to lower commodity prices and weaker refining and chemical margins. While the decline in earnings was expected, the accompanying cut to the dividend was not. Shell announced a first-quarter dividend of $0.16 compared with $0.47 for the fourth quarter, a 66% reduction. The announcement and magnitude came as a surprise, as we previously thought Shell’s ability to take on additional debt and reduce operating costs and capital spending would be sufficient to support the dividend and if not, it would return to a scrip debt as it has before. Additionally, peer BP, which has a higher debt load, maintained its dividend for the first quarter.

However, in announcing its decision, management cited unprecedented level of uncertainty given the fallout from the coronavirus and that it wanted a dividend that would be affordable in a wide range of scenarios and able to grow over time, suggesting the decision might be about more than just the current environment. The cut will save Shell about $10.5 billion per year, while in contrast a scrip option would have increased its total cash dividend outlay over time. Instead, the rebasing of the dividend now could ultimately afford Shell greater financial flexibility over the long term and allow for debt reduction and greater reinvestment. Additionally, it could tact more to a cash shareholder return program focused on repurchases as its U.S. peers do, which allows for more flexibility as well.

The dividend cut does not impact our fair value estimate or moat rating, leaving shares undervalued in our view. However, with a forward dividend yield of 3.8%, well below peers’, investors might look elsewhere in the sector to other integrated firms whose yield is higher and trade a similar discount. 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.