Royal Dutch Shell has slashed its shareholder dividend for the first time since the second world war and warned it is facing a “crisis of uncertainty” following the collapse of global oil prices.
The energy giant told its shareholders, including thousands of retail investors and pension funds, that it would be in their best interests for payouts to fall for the first time in almost 80 years. The payout is being cut by 66%, from $15bn last year to $5bn this year.
Ben van Buerden, Shell’s chief executive, said the “monumental” decision to reset the company’s dividend was difficult but necessary to preserve the financial resilience of the company against a “crisis of uncertainty”.
Shell is the biggest dividend payer in the FTSE 100 and the quarterly payout will fall by two-thirds to 16 cents a share. The company described the move as a “prudent” step in weathering the impact of the Covid-19 on the oil markets and the global economy.
Shell’s share price fell by 11%. Its market value has fallen by 44% since the beginning of this year, the fastest rate in the company’s history, and it has lost its place as the FTSE 100’s most valuable company to drugs maker Astrazeneca.
“We do not consider that maintaining the current level of the dividend is in the best interest of shareholders or the company,” Van Beurden said. “No CEO wants on their track record a cut to the dividend which is iconic in the market. But the situation we are facing is totally unprecedented.”
The collapse in global oil prices to 21 year lows following the outbreak of the pandemic earlier this year caused Shell’s profits for the first quarter to tumble to $2.9bn (£2.3bn), down 46% from $5.3bn in the same quarter last year.
The impact in the second quarter will “more severe”, Van Beurden said.
Shell plans to scrap all executive bonuses for this financial year, and rein in spending and costs to save up to $9bn. The company will “probably” consider voluntary redundancies.
“That is not going to happen anytime soon, if at all this year. But if this goes on, it is inevitable that there will be consequences,” Van Beurden said.
Shell’s decision to cut its dividend for the first time in almost 80 years breaks with a decades-long taboo among major oil companies against cutting shareholder returns. Shell will also stall plans to buy back the shares which it paid to shareholders in lieu of dividends during the previous oil market downturn in 2015.
Earlier this week, BP’s new chief executive, Bernard Looney, said the company’s board had decided not to cut its dividend for the first quarter despite plunging to a loss.
BP has cut its dividend only twice in the last 30 years, most recently in the wake of the Deepwater Horizon tragedy in 2010, which led to 11 fatalities and a bill topping $65bn. He did not rule out future cuts to manage a slow oil market recovery.
The market narrative regarding Shell’s dividend record will need to change, Van Beurden added. It will no longer be “‘no cuts since World War Two’, it is ‘no cuts since the last pandemic’,” he said.
Van Beurden said he does not expect a recovery in global oil markets or the world’s demand for oil over the medium term, meaning the company would need to prepare for the risk of a prolonged period of economic uncertainty.
The chief executive added that the collapse of global oil markets raises the likelihood that the world will reach ‘peak oil demand’ within the next decade. This may mean that the company shows preference to clean energy projects “which serve us better in the future”, he said.
Chad Holliday, the chairman of Shell’s board, said: “Shareholder returns are a fundamental part of Shell’s financial framework. However, given the risk of a prolonged period of economic uncertainty, weaker commodity prices, higher volatility and uncertain demand outlook, the board believes that maintaining the current level of shareholder distributions is not prudent.”