The Shell (LSE: SHEL) dividend has risen by 50% since 2020. Shell’s share price has doubled over the same period.
High oil and gas prices have allowed CEO Ben van Beurden to ramp up dividend payments after cutting the payout in 2020. However, Shell’s dividend is still only half what it was in 2019.
What’s more, the stock’s forecast dividend yield of 3.9% is less than the 4.1% predicted for the FTSE 100 in 2022.
Shell’s dividend growth is expected to slow from next year. Does it still make sense to buy the shares for income today? Here’s what I think.
Some good news
Shell’s dividend certainly looks very safe to me now. This year’s payout is expected to be covered five times by earnings. That compares to a long-term average of around two times earnings.
The chief executive has also been taking advantage of record profits to cut debt. Shell’s net borrowings have fallen from $79bn in 2019 to less than $50bn at the end of June.
This business has been gushing cash over the last year or so. But I think there are signs that the good times may be coming to an end.
Are profits about to fall?
Shell’s latest quarterly update revealed a sharp change in market conditions in recent months. The company said that a slowdown in demand for plastics meant that its chemicals business was expected to have lost money during the third quarter.
Fears of a recession have also seen petrol and diesel prices fall. Shell says that profit margins at its refineries are expected to have averaged $15 per barrel, down from $28 per barrel during the second quarter. That’s expected to reduce underlying profits by at least $1bn.
Profits from oil production and gas trading are also expected to be lower. Despite record energy costs for consumers, wholesale gas prices have actually fallen recently.
Shell shares: what I’d do now
Despite the global drive to reduce carbon emissions, I don’t think we’ll stop needing fossil fuels any time soon.
In my view, Shell is likely to remain an important part of this business. I think the group’s gas reserves, in particular, could be a great asset as countries gradually transition away from higher-emitting fuels such as coal and oil.
However, I think Shell’s dividend policy tells its own story. The company could afford to pay a much bigger dividend this year. But instead of doing this, Shell is using its spare cash to repay debt and buy back its own shares.
This strategy suggests to me that Shell’s management expect profits to be lower in the future. They may also be preparing the ground for higher levels of investment in new projects, including renewables.
Don’t get me wrong. I think Shell looks fair value at the moment and am confident the dividend will be safe for the foreseeable future. But I don’t see Shell shares as a best buy for income now. I think there are better choices elsewhere for dividend investors today.
