almost 4 years ago • 2 mins
Oil major Shell cut its dividend for the first time since 1945 on Thursday – just as a report from Goldman Sachs landed suggesting “variable” payouts could become part of the new normal for companies. So has the tide turned for income-focused investors? 🎣
Shell and rival BP were already the UK stock market’s top dividend payers, but with big British banks nixing their own profit-sharing recently, the two oil firms represented 30% of investors’ total dividend expectations for 2020.
That’s now somewhat lower. While BP and America’s ConocoPhillips kept their dividends steady this week, Shell on Thursday took existing cost-cutting initiatives one step further – slashing its payout by two thirds as it announced quarterly earnings that laid bare the impact of a tumbling oil price.
The company says this is a “fundamental shift” rather than a short-term measure – and Goldman Sachs appears to agree. In a report last week, it posited that many firms – particularly those in the oil industry – may in future offer explicitly “variable” dividends that better track performance throughout a business cycle, potentially creating more financial flexibility and resilience than fixed payouts 💪
Goldman’s thoughts and Shell’s actions fly in the face of a traditional taboo against dividend cuts. The popular “income investing” strategy is predicated upon the promise of stocks paying out regular dividends, rather than their uncertain on-paper price growth.
But with so many firms cutting dividends in response to coronavirus – and BP now looking likelier to follow suit next quarter – investors, like energy companies, may be forced to adapt. And a focus on growth may be no bad thing: according to investment manager Invesco, US recession “bear markets” have historically risen 57% on average three years on from initial lows – regardless of whether stock prices fall further in the interim.
Goldman, meanwhile, thinks that a variable-dividend approach could be good for companies’ share prices, reducing the stigma of dividend cuts and replacing expensive stock buybacks 😋
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