By early 2017 it seemed to some analysts that Royal Dutch Shell Shares were becoming unsustainable; the reason given for this bleak announcement was simple enough. Royal Dutch Shell Shares were becoming unsustainable because the dividends which they offered were themselves becoming unsustainable in the face of various problems that were dogging the big oil companies. In response to the problems and not wanting to face the backlash of unpopularity that would follow any cut in dividends, the company was taking steps that were like a slow motion self-liquidation. To finance the dividends, Royal Dutch Shell was selling assets as well as taking on debt. This seems like a desperate measure, and it is; we should perhaps remember the popularity of Royal Dutch shares among not only investors but also with fund managers attracted by the high yield for the dividend, and realise that as a result, many retirement funds rely on the dividend. Imagine if that dividend were to be reduced to get some idea of the backlash that would ensue and of the pressure that has been as a result placed on Royal Dutch Shell.
Yet it seems that the dividends for Royal Dutch Shell Shares are bound to fall unless we see a very unlikely return higher oil prices. The company, like several other oil giants, has been exhibiting alarming features in its cash flow; specifically, the inflow of cash is not enough to cover the cost of capital investments as well as the dividends which it is bound to pay on Royal Dutch Shell Shares. The company has been making up for this cash shortfall by disposing of assets and by running up debt. The dividend payments are being financed by steps which are steadily worsening Royal Dutch Shell’s overall financial viability. In the end, it seems that something is bound to give, and it will be the dividends, which will be subject to a hefty reduction or simply done away with. The consequences of this the value of Royal Dutch Shell stock can easily be imagined and will be painful for those who have the misfortune to experience it.
Another problem which analysts predicted for Royal Dutch Shell Shares was, as we have touched upon earlier, the question of the future price of oil. By early 2017 many oil industry outsiders were looking back on the recent high prices of oil with nostalgia and hoping that the good old days would return. Indeed if this was the case then Royal Dutch Shell Shares would not be unsustainable. This, however, did not seem likely, at least not at the start of 2017. Indeed it seemed more likely that the recent higher oil prices had been a bubble, the product of specific and unlikely to be repeated circumstances. If this does prove to be the case, and it is looking more likely that it is, then Royal Dutch Shell can look forward to either a future of further asset liquidation and mounting debt, or to an unpopular reduction in dividends. Either way, the prospect seems grim.
(Simon Topliss, Research)
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