Thursday, April 30, 2020

Royal Dutch Shell Cuts Dividends For The First Time Since World War II

I woke up to the news that Royal Dutch Shell (RDS.A) (RDS.B) has cut dividends for the first time since World War 2. The company slashed its quarterly dividend on its shares traded on NYSE from 94 cents/share to 32 cents/share. The turmoil in energy markets, coupled with a glut of oil and a shortage of storage amidst an unprecedented collapse in demand are a sure formula for dividend cuts.

This was an interesting decision, since BP (BP), Exxon Mobil (XOM) and Chevron (CVX) kept dividends unchanged in their most recent press releases. Actually, Chevron raised dividends three months ago, but that was before the recent turmoil in the energy markets.

The last time the group didn’t pay cash dividends was in World War Two, and the last time it cut them - as opposed to a temporary suspension - was during the Great Depression, according to Bernstein.

The last time I bought shares of Royal Dutch Shell was about a decade ago, when it had a track record of annual dividend increases. I also reinvested money from the sale of BP shares into Royal Dutch Shell shares. The company froze dividends in 2010, and by 2011 had lost its track record for consecutive annual dividend increases. 

Since I did not reinvest dividends automatically, and since I stop adding to a position after dividends are kept unchanged, I have not added to the stock in quite some time. As a result, it is small position for me, given the fact that I add to my portfolios every single month, and have done that for almost a decade since last adding to Royal Dutch Shell. This process is outlined in this article on risk management procedures that I follow.

Royal Dutch Shell did increase dividends in 2012, 2013 and 2014, but then kept the dividend unchanged or the next six years.

As part of my risk management process, I sell after a dividend cut. This situation is no different.

The most fascinating fact is that over the past decade, Royal Dutch Shell has distributed $36.32/share in dividends to shareholders. If you bought the stock at $50/share a decade, you recovered over 70% of your initial investment from dividends alone. If you bought at $60 a decade ago, you recovered 60% of your initial investment from dividends alone. Of course, if you held on to it for longer, you would have recovered your whole original purchase price from dividends alone. This is why I believe that dividends represent both a return on investment and a return of investment.

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