Why It Might Not Make Sense To Buy Royal Dutch Shell plc (AMS:RDSA) For Its Upcoming Dividend

Royal Dutch Shell plc (AMS:RDSA) is about to trade ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 13th of February will not receive this dividend, which will be paid on the 23rd of March.

Royal Dutch Shell’s next dividend payment will be €0.47 per share, on the back of last year when the company paid a total of €1.88 to shareholders. Calculating the last year’s worth of payments shows that Royal Dutch Shell has a trailing yield of 7.3% on the current share price of €23.68. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Royal Dutch Shell

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Royal Dutch Shell paid out 96% of its income as dividends, which is above a level that we’re comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out more than three-quarters (79%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It’s good to see that while Royal Dutch Shell’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we’d be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

ENXTAM:RDSA Historical Dividend Yield, February 9th 2020
ENXTAM:RDSA Historical Dividend Yield, February 9th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That’s why it’s not ideal to see Royal Dutch Shell’s earnings per share have been shrinking at 3.6% a year over the previous five years.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Royal Dutch Shell has lifted its dividend by approximately 1.1% a year on average.

To Sum It Up

Is Royal Dutch Shell an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. What’s more, Royal Dutch Shell is paying out a majority of its earnings and over half its free cash flow. It’s hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Royal Dutch Shell? See what the 22 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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