Dear David

 I have been a subscriber to your excellent service for several years and I know that you have a significant holding in Royal Dutch Shell B (RDSB). Personally I do not think the prospects for RDSB over the medium term are very good and I have just sold my holding for the following reasons.

 RDSB has enjoyed a good bounce recently on the back of rising oil prices plus the £GBP’s devaluation following the UK’s EU referendum vote. Also, on the face of it, it has a generous forecast dividend yield of 5.5%.  However, the results for the last year (Dec 2015) plus the forecast results for the next three years (see attached Sharescope Results sheet for RDSB) show that the actual and forecast eps growth over this period are fairly flat and insufficient to cover the dividends proposed. Indeed the eps over this period would need to be grow by 76% for 2015, 66% for 2016, 34% for 2017 and 16% for 2018 to ensure that the proposed dividends for these years are fully covered.

 The above forecast results suggest to me that RDSB will have to cut its dividend significantly in the near future which is likely to result in a slump in the share price.

 May I ask for your thoughts on the prospects for RDSB’s over next few years.

Regards

David Fuller's view

Thank you for sharing your research on RDSB with us. 

I have tended to hold onto share positions in my long-term investment portfolio for too long, so I appreciate your thoughts.  I am relieved and pleasantly surprised that RDSB has rallied so sharply recently, not least as a number of other subscribers also hold it.  The company would very much like to maintain its dividend and has cut overheads as I am sure you know. 

Nevertheless, I think there are only two ways RDSB could do this over the next few years.  The first would require sharp additional price increases in Brent crude oil and particularly natural gas.  I think prices for these two fossil fuels can rise somewhat further in volatile market conditions which have favoured natural resources this year.  However, both have backed away from their highs recently.  More importantly, leading countries and companies have the technology to increase production significantly, and would do so in the event of somewhat higher prices.  I doubt that they will rise enough to cover RDSB’s dividend, unless China’s scary moves in the South China Sea lead to serious conflict which no sane person would like to see. 

The second way RDSB could pay its dividend would be through extensive borrowing at today’s historically low interest rates.  However, that would raise concern and not be prudent management in my view. 

Lastly, there is the question of how much the share price would fall back in the event of a dividend cut?  That would depend on market sentiment at the time, to some extent, and RDSB is certainly overbought on a short-term basis.  However, I remain reasonably optimistic about RDSB’s long-term prospects.