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Another day, another dividend cut.
Big Oil has almost always been dependable for dividend investors and energy investors. Normally, a major oil company would slash its spending and sell off assets before it would cut the dividend.
That isn’t true anymore.
On Monday, that changed.
Royal Dutch Shell (RDS-A), which has been a dependable dividend payer since World War II, pared its dividend by two-thirds. So, while it had been a Dividend Aristocrat, raising its dividend for more than 25 years in a row, it has now lost its crown.
The cut caught energy investors by surprise, especially since Shell’s earnings were actually pretty decent.
In the first quarter, when the world was literally awash in oil, Shell took in $60 billion. True, that was a 28% decline in revenue compared to a year ago, but it still made $2.8 billion in profit. On top of that, free cash flow, which backs out non-cash costs, came in at $12.8 billion.
The dividend only costs the company about $3.5 billion a quarter.
True, Shell, like most oil companies, is struggling against oil prices at levels we haven’t seen since the late 1990s. And with what looks like a global recession in the offing, oil prices probably aren’t going to improve anytime soon.
So, what’s the problem?
Shell is essentially betting that economic growth is going to drop off a cliff and not rebound in the foreseeable future.
That’s bad news for income investors and energy investors. Shell is actually one of the better-run oil majors, so, if it’s that pessimistic, odds are that other oil majors are going to follow suit. If Shell can get away with cutting its dividend, others would be at a competitive disadvantage if they didn’t.
This is a bad omen for oil investors and energy investors generally.
Dividends aren’t sacrosanct anymore.
That’s not just a bad sign for energy investors but for the economy, since energy is its backbone. Sure, consumer spending accounts for about 70% of U.S. economic activity, but we wouldn’t have anything to consume without energy driving the factories.
It looks like we’re in for some rough times ahead . . . not that you need me to tell you that.
Here’s to Profits,
Ben Shepherd