Why has Royal Dutch Shell Plc chosen to put its business before its shareholders?

Shell shares slumped around 11% in Thursday’s trading session as it reduced its dividend for the first time since World War II.

Describing Plc’s () first dividend cut for over 80 years as a show of strength is obviously a tough needle to thread, nonetheless, for anyone looking beyond this quarter’s payment there is perhaps something positive to take from the news.

There is little-to-no solace for those holding the oil supermajor as a utility-like dividend share.

That the payout wasn’t scrapped altogether is likely meagre relief for the portfolio-builders, retirees or pension funds that depend on Shell’s yield.

READ: Shell cuts dividend by 65% as crude collapse hits profits

Shell is but the latest blue-chip to either cut or cancel dividends amid the current crisis, the running total for the shortfall is now close to US$35bn.

So, it is bad news for Shell in as much as it is bad news for its income-seeking shareholders.

Contra to this admittedly simple and obvious narrative, a case could be made that it was an important call for Shell’s business in the longer term.

As one of the world’s largest petroleum producing firms Shell already faced quite fundamental challenges to its status quo, even before COVID-19 decimated demand and crude prices.

For many months prior to coronavirus lockdown there was growing sense that public sentiments (and even sentiments of some capitalists) were moving away from fossil fuel and hydrocarbon businesses.

At the same time, before COVID provided the tipping point, the crude market was encumbered by structural challenges and geopolitical posturing.

By nature and by metaphor Shell is a slow turning oil tanker.

Like industry peer and London portfolio stalwart it also has had to carry a sacrosanct dividend policy.

Quite whether the COVID forced dividend-cut breaks the voodoo in the longer term, to potentially unshackle management to rebase future dividends remains uncertain.

One light dividend payment doesn’t turn Shell into a nimble and decisive small-cap overnight, but, it was clearly a choice to put the businesses before the dividend.

Whilst bad, Shell’s bottom line financials were mostly in better shape than BP’s.

A number of investor updates before Thursday’s results suggested Shell had the capacity to take on more debt and absorb the shareholder payouts for at least the remainder of this year.

Breaking an eight-decade long dividend policy sees Shell save US$2.4bn of cash immediately and potentially allows the Anglo-Dutch more ‘optionality’ going forward.

Hargreaves Lansdown analyst Nicholas Hyett, in a note, said: “While this is very unwelcome news for income investors, given that Shell is one of the largest dividend payers on the entire stock market, it may be better news for the long-term health of the business.

“The need to service a cash hungry dividend has seen future investment sacrificed and assets sold.

“Essentially both Shell and BP have been slowly digesting themselves to keep the dividend ticking over. Removing that pressure allows the group to focus on the future and also secures the future of recently announced renewable energy investments.”

European bank Berenberg, which currently retains a ‘buy’ rating for Shell, meanwhile, cautioned that the dividend decision may cap the share price.

“While it gives management breathing room and may allow a reset for a more sustainable dividend policy over time, we believe that yield was the main attraction for investors in the stock,” Berenberg analyst Henry Tarr said in a note.

“The dividend cut could, therefore, limit the recovery potential for the share price.”

As Shell is steered out of the current crisis and, some attentions again turn back to energy transition, it will be intriguing to see whether dividends remain lower for longer, or whether the oiler quickly returns to business as usual.


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