The Royal Dutch Shell (LSE: RDSB) share price currently supports a dividend yield of 10%. This looks extremely attractive in the current interest rate environment.
However, over the past few weeks, blue-chip dividend stocks have been lining up to announce dividend cuts, as they try and conserve cash to cope with the coronavirus crisis. These actions have sparked concern that Shell could be next to chop its payout.
Luckily, the company has been quick to take action to safeguard its payment. With this being the case, it looks as if now could be the time to buy the Shell share price for its 10% dividend.
Shell share price: dividend security
Last week, the group informed the market it has signed a new multi-billion-dollar credit facility, to the tune of $12bn. It was part of management’s actions to bolster the balance sheet and support the Shell share price.
The new facility came hot off the heels of another $10bn line of financing agreed in December. Together, as well as other resources, these credit lines give the group more than $40bn of cash to weather the current storm.
The company has also announced actions to reduce capital spending, falling to $20bn for 2020. Initial projections suggested the group was going to spend as much as $25bn this year on capital projects. Management is also looking to reduce overall operating costs by $3bn to $4bn this year.
These actions should help free up more cash for the group. If the oil price recovers, management’s efforts to reduce costs should also help the business recover faster than its peers.
Further, the group now has the firepower to acquire struggling peers. In the last oil price crash five years ago, Shell did just that. It acquired liquefied natural gas (LNG) producer BG Group at the bottom of the cycle. The deal made the oil major one of the largest LNG producers overnight. These supply contracts reduced the business’s dependence on oil, which should help it move through this downturn in one piece.
Acquisitions could also help the Shell share price recover faster when the oil market rebounds.
City analysts believe all of the above will be enough to ensure Shell’s dividend is safe for the next 12 months. That’s based on current oil prices of around $30 per barrel.
If oil prices remain below $30 for longer than 12 months, then the company might have to make some tough decisions. However, with most economists predicting a recovery in economic activity towards the end of 2020, it seems likely the Shell share price will not disappoint investors over the next 12-24 months.
Even if the downturn does last longer than expected, Shell has lots of options. The company can cut costs further, or turn to script dividend payments, as it did in the last oil price downturn. With these payments, the business issues shares instead of cash. This allows the business to maintain its dividend while reducing cash outflows.
All in all, it looks as if the company has the financial firepower to survive the current downturn. That’s why I think it could be time to buy the Shell share price, and its 10% dividend yield, today.
The post I think it could be time to buy the Shell share price’s 10% dividend yield appeared first on The Motley Fool UK.
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Rupert Hargreaves owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020