Shell faces spending scrutiny after dividend cut

Royal Dutch Shell is facing growing pressure from investors for clarity on its spending plans after the company announced a dramatic two-thirds cut to its quarterly dividend

In discussions with the Anglo-Dutch group’s chairman, chief financial officer and investor relations team in recent weeks, some of the world’s biggest asset managers and pension funds have pushed for disclosure on its capital allocation strategy — from new projects to shareholder payouts.

At least four of Shell’s biggest investors said they had separately held conversations with the oil company urging it to outline how it planned to create value for shareholders in the coming years in the wake of the dividend cut. 

One top 20 investor said: “If you can’t understand where the company is going, and they aren’t paying a dividend [as large as before], why would you own the stock? We are pissed off with them because they cut the dividend.”

In April Shell reduced its quarterly payout to 16 cents a share from 47 cents — its first dividend cut since the second world war. The company said it was part of a rebasing as it made a “fundamental shift” over the next 30 years to become a net-zero emissions business by 2050.

The move, which coincided with a dramatic hit to earnings from the coronavirus pandemic, marked a U-turn from 2019 when it pledged $125bn in shareholder handouts over the next five years. 

“We have asked them what they are planning to do with this cash [that they will save from the dividend cut]. They are struggling to answer that,” the top 20 investor said. 

Shell argues that this is money the company does not necessarily have in the first place.

Ben van Beurden, chief executive, said in May that it was “not wise, prudent or even responsible to pay out a dividend if you know for sure that you have to borrow for it, deplete your liquidity and, at the same time, also reduce the resilience [of the company’s finances] in a world that will be totally unpredictable for some time to come”.

The hefty dividend had always been central to Shell’s investment case but analysts had long questioned its sustainability given the pressure on the company to shift from hydrocarbons to lower-margin, cleaner energy businesses in the future.

But investors said that given Shell’s decision was akin to making a call on how the energy market would play out in the future, the oil major also needed to set out an updated capital allocation plan for the coming years.

On a group call with big investors in May, chairman Chad Holliday faced a barrage of questions over why Shell had not combined the dividend shift with a clear strategy for the future. 

Another top 20 investor said it had been holding “lots of one-to-ones” with Shell because the oil group had “an issue with clarity of capex plans”.

A third large shareholder said that more than a month after the dividend cut, investors urgently needed details on the company’s capital allocation plans. 

The company said it would give investors a strategy update when it was clearer how it would get through the coronavirus crisis.

Shell said in March that it would not continue with the next tranche of its share buyback programme. The company also said it would cut capital expenditure to $20bn or less this year, from $25bn in 2020 and reduce operating costs by up to $4bn. 

It is also scrapping bonuses this year, delaying projects and firing contractors. The company has cancelled its purchase of a fourth executive jet due for delivery in May to conserve cash, after taking delivery of three new aircraft to replace an older model between February 2019 and February 2020.

Additional reporting Peggy Hollinger