Shell’s (LSE: RDSB) merger with BG Group will create a Footsie titan. The enlarged group will make up around 10% of the index, and provide 10% of the index’s dividends.
And at present levels the company supports a dividend yield of 6.2%, a yield that’s hard to turn down.
However, some analysts have begun to voice their concerns about the sustainability of Shell’s dividend payout after it acquires BG. Should dividend investors be worried?
Oil trade
The success or failure of Shell’s multi-billion dollar purchase of BG hinges on long-term oil price assumptions.
For example, if the price of oil returns to $90/bbl then the deal will yield terrific results for Shell and the company’s shareholders. If the price of oil rises to $70/bbl, the deal becomes manageable. Nevertheless, if the price of oil continues to languish at around $50/bbl then this deal could come back to haunt Shell.
You see, the crowning jewels in BG’s empire are the company’s oil & gas assets in Brazil. When combined, BG and Shell will be the largest foreign oil company in oil-rich Brazil, although most of BG’s Brazilian assets aren’t profitable with oil trading at $50/bbl.
But Shell’s analysts believe that the price of oil will recover to $90/bbl, which is why the company has decided to do this deal now. Based on these assumptions, analysts believe that the deal will be strongly earnings-accretive from 2018 and the dividend will be safe.
Balance sheet risk
Concerns have also been raised about the state of Shell’s balance sheet after this deal completes. Indeed, Shell is paying a 50% premium for its smaller peer, a total of £55bn including debt. Many analysts have stated that this slug of debt will put pressure on Shell’s balance sheet.
That being said, Shell’s management has stated that the company is planning to shed around $30bn of asset over the next few years to help fund the deal. Private equity buyers are already swarming around the company for its unwanted assets, so hitting the $30bn target shouldn’t be an issue.
Additionally, Shell believes that it can deliver $2.5bn in annual savings once the deal completes. These savings should only improve the enlarged company’s financial flexibility.
How safe is that dividend?
So, is Shell’s prized dividend at risk following the BG deal?
Well, it really depends on the price of oil. If oil returns to $90/bbl then the dividend will be safe, but oil remains depressed then Shell might have to rethink its dividend policy.