News of a sinking oil price and subsequent dip in investor appetite for the world’s major oil plays like Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has dominated the newsflow in recent months.
Concerns over rampant oversupply have pushed crude prices to a string of multi-year lows in recent months, and Brent collapsed to its cheapest since the summer of 2009 at the end of last week around $62.50 per barrel.
Many across the investment community are predicting that prices could even fall as low as $40 per barrel, as abundant supply from the US, combined with subdued demand caused by worsening economic conditions in China and Europe, weighs on prices.
Dividends expected to gush higher
Despite signs of a worsening supply/demand market imbalance, however, the City’s army of analysts still expect Shell to continue delivering solid dividend growth, at least during the medium term.
Indeed, the business is expected to lift the total dividend 1% in 2014 to 182 US cents per share due to the effect of significant streamlining and cost-cutting across the business — the fruits of these endeavours are expected to propel earnings 32% higher.
The impact of a nosediving crude price is expected to catch up on the firm again next year and send earnings 7% lower, however. But Shell is still anticipated to lift the payout once again in 2015, up 4% to 189 cents.
As a consequence the oil colossus carries yields comfortably in excess of the current forward average of 3.3% for the FTSE 100, with figures of 5.3% and 5.4% for 2014 and 2015 correspondingly.
… but market troubles could punish projections
Still, I believe that investors should view these forecasts with extreme caution given the rapid deterioration of the black gold market, particularly for next year.
The fossil fuel giant was forced to holster its progressive dividend policy as oil prices collapsed once the 2008/2009 financial crash hit — the business kept the payout locked at 168 cents for three years until 2012 as subsequent restructuring got off the ground.
And investors should be concerned that dividend cover through to the end of next year registers below the widely-regarded security benchmark of 2 times or above. A reading of 1.9 times for 2014 is hardly calamitous, but a sharp slip to 1.6 times for 2015 could prove to be hazardous for payouts.
The result of aggressive asset shedding has enabled Shell to reward investors handsomely with above-average dividend yields and extensive share buybacks in recent years.
And although this scheme continues to click through the gears — the company has offloaded more than $12bn worth of projects in the current year alone — there is only so far the company can travel down this path before it significantly harms its growth profile.
With the oil market appearing set to endure worsening fundamentals over the next few years at least, shareholders could see dividends at Shell come under severe pressure once again.
