Royal Dutch Shell plc RDS.A announced that it would offer its shareholders the option of Scrip dividend – receiving company stock instead of cash dividend – from the first quarter of 2015. The company further added that that only A Shares would be issued, even to investors holding B Shares.
The integrated energy major had earlier offered scrip dividend from 2010 through May, last year. However, the program was terminated as it intended to increase focus on share buybacks and cash payments.
So, we are back to square one. This does not really come as a surprise as many big energy firms turn to scrip dividends when generating cash becomes a challenge in times of tumbling commodity prices.
Following a weak fourth quarter, Shell stated that the dividend may not see a rise in the upcoming quarter. Thus, the scrip dividend move was a logical one by the firm as it is expected to help its cash position, especially as the weakness in crude price is likely to continue through 2015.
However, the issuance of additional units will result in share dilution which may not be well received by investors. Further, as the issued shares are limited to ‘A Shares’, B shareholders may not be too keen on the prospect.
Is Shell Still a Good Bet?
Big players like Shell, with their large and diversified operations, are better-suited to withstand the current weakness in commodity prices. Its integrated nature of operations also offers some relief. Additionally, it is better positioned than many of its peers like TOTAL S.A. TOT, BP p.l.c. BP, Chevron Corporation CVX.
However, the current weakness continues to linger upon its operations, at least in the near term. Also, despite announcing spending cuts of $15 billion over next three years, Shell’s annual capital expenditure remains quite high by industry standards. This is expected to substantially increase the group’s leverage and deteriorate its credit metrics during the current downturn. As such, we expect Shell ADRs to remain soft in the near term.
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