FTSE 100 oil and gas giant Shell (LSE: SHEL) recently reported a quarterly profit of $11.5bn. Will this windfall translate into a record dividend for Shell shareholders?
As I’ll explain, the market is pricing in a cautious approach to dividend growth from Shell. In this piece, I’ll share the latest dividend forecasts with you and explain what I think may happen next.
Shell dividend: latest forecasts
Shell is expected to pay a £6bn dividend to shareholders this year. But despite a chunky increase in 2021, Shell’s current dividend is little more than half the payout shareholders received before the 2020 crash.
City analysts expect chief executive Ben van Beurden to remain disciplined when it comes to dividend growth. They’re forecasting a 15% dividend increase for 2023, with smaller increases in 2023 and 2024.
In this table, I’ve listed the latest dividend forecasts I can find for Shell, based on a share price of 2,235p.
| Year | Forecast dividend* | Dividend yield |
| 2022 | 83p | 3.7% |
| 2023 | 89p | 4.0% |
| 2024 | 93p | 4.2% |
Oil and gas prices can be volatile. But these payouts are expected to be covered at least four times by earnings. That’s a big margin of safety.
I’m happy to go on the record here and say that I think there’s zero chance of Shell cutting its dividend again in the next five years.
I should point out that this is only my opinion. I may well be wrong. But based on the information available today, I can’t see any reason to expect a cut.
Indeed, I think a more important question for shareholders to consider is why isn’t Shell paying bigger dividends?
Why won’t Shell pay bigger dividends?
Shell’s forecast dividend yield of 3.7% is almost the same as the FTSE 100 average of 3.6%. Much higher yields are available elsewhere. But despite reporting record profits this year, the CEO has resisted any pressure to pay out more cash directly to shareholders.
Instead, he has used Shell’s surplus cash to repay debt and buy back the company’s own shares.
The numbers are fairly staggering. So far this year, Shell has bought back $8.5bn of its own shares and reduced net debt by $6.2bn.
In my view, there are two main reasons for Mr van Beurden’s caution.
The first is that oil and gas prices have always been cyclical. History suggests they won’t stay this high forever. Shell needs to be sure its dividend will be sustainable through future lows.
Looking further ahead, the energy transition from fossil fuels to renewables could have a big impact on Shell. I think the company will adapt, but I think that a lot of new investment will be needed. Future profits may be smaller.
Would I buy Shell shares today?
Cutting debt and buying back shares should help to protect Shell’s future. But with profits likely to peak this year and a dividend yield of 3.7%, I don’t think Shell shares are a screaming buy.
In my view, there are better options elsewhere in the energy sector.