Oil Investors Betting on Payout Cuts Ignore Years of History

  • Royal Dutch Shell Last Cut Shareholder Dividend in 1945
  • Yields Soar to Highest in at Least 20 Years as Stocks Slump

Shares of the largest oil companies have slumped so low it suggests investors expect the crash in crude prices to force cuts in dividends. History tells a different story.

Oil’s collapse has driven the annual dividend yield at Royal Dutch Shell Plc to at least a 20-year high of 7.7 percent this week, compared with 4.4 percent for the benchmark FTSE 100 Index. The yield -- the annual return divided by the share price -- is also at a two-decade high at Exxon Mobil Corp. and Chevron Corp.

“The market is telling us that investors think the dividend payouts may not be sustainable with oil at this level,” said Ahmed Ben Salem, a Paris-based analyst with Oddo & Cie. “History suggests otherwise. Oil companies are very attached to their dividend policy and if they were to cut it they’d lose a lot of investors.” 

Shell, Europe’s biggest oil company, has weathered market ups and downs for seven decades -- including oil at less than $10 a barrel in the 1980s and 1990s -- without cutting dividends. In the U.S., Chevron said last month it’ll keep increasing the annual payout -- as it’s done for the past 27 years -- even as profit dropped to a 12-year low.

Shell Chief Executive Officer Ben Van Beurden and BP Plc boss Bob Dudley have made dividends their top priority to return money to shareholders. At the same time they’re slashing spending, selling assets and preserving cash flow to protect the balance sheet in a declining oil market.

Market Rout

Oil futures are trading below $40 a barrel in New York, less than half the price a year ago, on concern slowing growth in China will hurt demand just as OPEC and the U.S. expand a global glut.

Crude at this level intensifies the debate on whether companies should stick to their dividend. A reluctance to cut the payout carries serious risks if low prices persist, said Nick Butler, chair of the Kings Policy Institute at Kings College London and former vice president of strategy at BP.

“The mistake is to assume dividends can or should always be maintained,” he said in an e-mail. “They should vary according to circumstances.”

The companies’ chief executives think differently. BP’s Dudley said last month his “first priority” was payouts to shareholders. Shell, which has announced a 20 percent reduction in spending this year, has “more levers to pull” should oil prices drop further, Van Beurden said July 30.

Better Shape

“Certainly the yield of the majors is high now, but there’s nothing to suggest dividend will be cut,” said Oswald Clint, a London-based oil analyst at Sanford C. Bernstein & Co. “These companies are in much better shape today with cost-reduction upside.”

Eight of Europe’s integrated oil companies -- those that have refining and marketing operations as well as exploration and production -- had a combined $111 billion of cash on their balance sheets at the end of June, Clint wrote in a report on Tuesday. That compares with $50 billion cash in 2009 during the financial crisis. Their gearing -- or the ratio of debt to equity -- dropped to 19 percent from 22 percent in the period.

The companies are also cutting expenses in other ways. Stock buybacks have declined and some companies, including Total SA and Shell, have introduced optional scrip dividends, which are paid in shares rather than cash. Exxon has this year bought back shares valued at $1.5 billion, down from almost $13 billion in 2014 and $16 billion in 2013.

There have been exceptions. Transocean Ltd., the world’s top offshore rig operator, said Tuesday it plans to halt dividend payouts as oil’s slump weakens demand for its drillships. Eni SpA become the first major oil company to cut its dividend this year, reducing the payout for the first time since 2009. BP suspended its dividend for the first three quarters of 2010 following the Gulf of Mexico oil spill.

Worst Performer

Oil’s slump has been brutal. More than half a trillion dollars of value has been wiped from the five biggest international oil companies -- Exxon, Shell, Chevron, Total and BP -- since mid-June last year. The industry is the worst performer in the MSCI World Index this year.

Still, no oil CEO wants to make headlines by depriving investors of their dividend. By cutting spending, Shell has reduced the crude price at which it breaks even -- where sales equal costs -- to $80 a barrel from $100. Oddo’s Salem expects that to drop to $60 in 2017. Using the scrip dividend and chopping more from investments will reduce that further, according to Bernstein’s Clint.

“Shell didn’t cut the dividend even during the world war,” Salem said. “They will resort to other means to bring down costs.”

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