When a companys share price gets hammered down to theextent that the dividend yield rises to high single- or double-digits, the market is effectively pricing-in a dividend cut.
The market is rarely wrong on these occasions.
We saw it happen tobanks and insurers as the financial crisis unfolded. And were seeing it now withminers and oil companies as over-supply and the collapse of commodities prices take their toll.
In the mining sector, dividends have toppled at Anglo American, Glencore and Rio Tinto, leaving BHP Billiton as the only FTSE 100 giant with its payout yet to be slashed although an announcement of a rebasing looks just about nailed-on to accompany the firms half-year results on 23 February.
Meanwhile in oil, dividends from mid-sized and smaller operators have already been decimated. However, heavyweights Royal Dutch Shell (LSE: RDSB) and BP as well as French giant Total have all recently pledged to maintain their payouts.
I believe the oil supermajors could defy the sceptics. And of the two Footsie giants, I see Shell as a particularly attractive proposition.
A bold commitment
Shells results for 2015 didnt make for pretty reading last week. The headline numbers were awful: revenue down 37% and bottom-line profit collapsing by 87%.
Nevertheless, the board fulfilled its commitment to maintain the dividend at the previous years level and reiterated its earlier guidance for the year ahead: Shells dividends for 2015 were $1.88 per share, and are expected to be at least $1.88 per share in 2016, as previously announced.
Given the collapse in revenue and profit in 2015, and the price of oil having further declined thisyear, how can Shell possibly make such a commitment?
Levers
Its all about cash flow. Shell used a number of levers to manage cash flow during 2015, including reducing operating costs and capital investment, and increasing borrowings. There will be more of the same this year, with the soon-to-be-completed acquisition of BG Groupproviding further levers. For example, well see a reduction of some 10,000 staff and direct contractor positions in 2015-16 across both companies.
In addition to planned actions to manage cash flow, management has scope for more lever-pulling to fulfil its dividend commitment: Shell will take further impactful decisions to manage through the oil price downturn, should conditions warrant that.
Prospective 8.7% income
Shells high yield is being boosted for UK investors by the trend in the $/ exchange rate.The companys $1.88 payout in 2014 translated to 118.48p.
For 2015 based on the sterling dividends paid for the first three quarters and the current exchange rate for Q4 the same $1.88 payout will translate to around 125p.
And if the current exchange rate were to prevail through 2016, wed be looking at a payout in the 128p-129p area. Shells shares are trading at 1,480p, as I write, so the potential income works out at 8.7%.
Life-changing income stream
Of course, no company with a yield as high as Shells is risk-free. However, management does have much within its power to maintain the dividend through the downturn and showsa strong commitment to doing so.
Shells boss rightly says the acquisition of BG marks the start of a new chapter rejuvenating the company, and improving shareholder returns. If Shell can get through the oil price rout, investors buying into the current yield could have a supercharged perhaps even life-changing income stream in decades to come.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.