Shell shows prudence on dividend, but no remorse on $16bn share buybacks

A title on Ben van Beurden’s bookshelf in his video message to Shell investors captured the mood – Fall of Giants, by Ken Follett. A pillar of the UK stock market has tumbled. Shareholders have been sure of Shell’s dividend since the second world war, but now the distribution has been cut by two-thirds. The chief executive himself called the decision “monumental”.

It looks the correct move, however, for the reasons Van Beurden gave. The collapse in global demand for oil isn’t a matter of a few percentage points. It was 30% in April, which obliges a management to budget for lower oil prices for longer.

Shell reckons it can knock $9bn (£7.1bn) off operating costs and capital expenditure, but the saving is insufficient if a barrel of Brent could fetch $20 to $30 for a while yet. The aim is to protect Shell’s balance sheet at a moment “when we have no idea what could happen”. Butchering the divi will save almost $10bn a year.

Mind you, $16bn is also a tidy sum. That’s how much Shell spent on share buybacks between July 2018 and January this year – all at prices above £22 v the current £12.86. Van Beurden, while congratulating himself for being responsible with the divi now, forgot to express remorse over the buyback. It’s not as if Shell’s balance sheet was unencumbered by debt at the time.

Still, the new preference for prudence stands in contrast to BP’s stance on divis earlier this week, which was to keep paying at the old rate, or try to do so. BP chief Bernard Looney, whose balance sheet looks as strained as Shell’s, needs to explain how he will protect his much-trumpeted planned investments in long pay-back renewable assets. We’ve heard the good intentions; let’s see the arithmetic. The strong hint from Shell was that investing in energy transition is harder if you’re over-distributing dividends.

Shell remains a giant of the FTSE 100, of course, but it’s no longer the biggest. With perfect timing, soaraway AstraZeneca, as it unveiled its tie-up with Oxford University to develop and produce (we hope) a Covid vaccine, edged ahead on market capitalisation on Thursday. AstraZeneca’s shares are up 9% this year, while Shell’s are down 40%. The pandemic is sorting stock market winners from losers at astonishing speed.

Transparency is commendable, yet ‘base’ assumption appears bullish

Visibility is as poor for banks as it is for oil companies. The 95% plunge to £74m in Lloyds Banking Group’s first-quarter profits was driven by an £1.4bn impairment charge, the largest part of which was an estimate of the size of the bad loans that will inevitably show up soon.

Managements have to conduct these impairment exercises even in normal times, but rarely does the process feel so much like guesswork. Doing its best to demonstrate rigour, Lloyds sketched four pictures of the UK economy over the next few years – “base”, “upside”, “downside” and “severe downside” – and then applied a probability weighting to arrive at its impairments. The first three were awarded 30% probability and hell was given 10%.

It’s one way to do it and the transparency is commendable. Yet a “base” assumption of a 5% decline in GDP feels a little bullish – many economists expect much worse. Still, the £1.4bn impairment was at the conservative end of City analysts’ own guesses, so it’ll do for now. Everyone knows the end-of-year figure will be bigger.

Now is a good time to say something

It is now five full weeks since Intu, the debt-laden owner of shopping centres, including Lakeside in Essex and Trafford near Manchester, said it had an “ongoing dialogue with the UK government and may look to access their £330bn support package”.

The statement was mysterious since the Covid Corporate Finance Facility, the relevant scheme for companies the size of Intu, is only open to firms that can demonstrate they were in sound financial shape before the crisis. With the best will in the world, nobody would put Intu in that bracket. The stock market values the equity at just £80m while the borrowings are £4.5bn.

Has Intu’s “ongoing dialogue” with government gone nowhere? And how goes the other dialogue with banks and bondholders? Now would be a good moment for Intu to say something, lest boardroom silence is interpreted as despair.

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