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Shell shows way forward for dividends as other blue chips cut their cloth

Oil major guides to total dividends and share buy-backs of US$125bn “or more” between 2021 and 2025

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Shell hiked its free cash flow guidance from US$25-30bn per year by 2020 to US$35bn

While fellow FTSE 100 constituents Vodafone Group PLC (LON:VOD) and Marks & Spencer Group PLC (LON:MKS) both cut their dividend, Royal Dutch Shell PLC (LON:RDSB) is not just standing firm but decisively striding in the other direction. 

In its strategy update on Tuesday, the oil colossus promised to lift shareholder distributions via dividends and share buy-backs to “US$125bn or more” between 2021 and 2025.

READ: Shell lifts capex and cash flow forecasts

This is ahead of the market expectations and up almost 40% from the US$90bn in 2016-2020 and 140% up from the US$52bn in 2011-2015.

After cutting the cloth of its costs in recent years to fit the tighter market conditions, Shell now has the confidence to upgrade its shareholder returns guidance as free cash flow guidance is lifted from US$25-30bn per annum by 2020 to US$35bn by 2025, with capital expenditure guided to US$30bn per year, compared to the current average forecast of $27.5bn for 2021.

As Shell said it planned to complete its current US$25bn buyback by the end of next year, subject to further progress with debt reduction and oil price conditions, and would not confirm the increase to the dividend per share until there was “line of sight” to that point.

Mix of dividends and buybacks

Shell also maintained flexibility in the mix of the new 2021-2025 distributions.

Analysts at RBC Capital Markets said that assuming average dividends of $14bn per annum, this would equate to around $80bn in share buybacks over the period, and compares to the Canadian bank’s $107bn cumulative estimate over the same period.

Graham Spooner, investment research analyst at The Share Centre, wondered about the deeper meanings behind Shell’s new dividend confidence, especially as M&S and Vodafone have cut their payouts in recent weeks and the likes of BT Group PLC (LON:BT.A), Centrica Plc (LON:CNA), Galliford Try plc (LON:GFRD) and SSE PLC (LON:SSE) are being watch closely for similar moves.  

“With thoughts on peak oil creeping ever closer and predictions of the oil price more difficult than who will be the next Prime Minister, what should investors take from Shell’s strategy update through to 2025?” Spooner pondered. 

With many investors attracted to the 5% plus yield of the stock, he said the improved outlook of cash flow of around $35bn based on $60 per barrel should continue to underpin good returns.

READ: High FTSE yields point to 'dividend slaves' that may cut payouts

Even though Shell’s outlook appeared to be promising its shares were down 0.3% to 2,479p on Tuesday and Spooner had a word of caution for investors. 

“Investors should be wary that any material fall in oil prices could once again raise questions about the company's ability to maintain its dividend,” he said.

The RBC analysts agreed that the distribution strategy “is dependent on a constructive oil price environment”, while adding that potential negative for the market of higher capex guidance was offset by operating cash flow guidance “materially ahead of market expectations, which paves the way for continued positivity should Shell convince the market on its plans”. 

On the flip side, RBC see Shell’s target of at least 12% return on average capital employed by 2025 as “a little underwhelming, although this potentially points to the changing earnings mix away from its conventional oil & gas business and towards power”.

Quick facts: Royal Dutch Shell PLC

Price: 1238 GBX

Market: LSE
Market Cap: £96.8 billion

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