This is the biggest dividend payer in the world - but is a cut on the cards?

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The saying that investors should 'never sell Shell' is becoming increasingly questioned as the company's debt pile balloons and its payout becomes less and less covered by earnings.

Royal Dutch Shell has long been a staple of equity income funds - it has not cut its dividend since 1945, and in 2016 became the largest payer in the world, returning £11.1 billion to shareholders throughout the year according to the Capita Dividend Monitor released last week.

However, the dividend cover on its expected 6.4 per cent yield for 2017 is just 1 times, says broker AJ Bell, meaning it will pay out all of its profits to investors in the coming 12 months.

Is this a smarter way to invest in oil?

'WHY I SOLD SHELL'

Furthermore, after its $50 billion (£40 billion) takeover of BG Group its total debts now stand at $79 billion. This is equal to £7 of debt per share, whereas it has just £2 of earnings per share (EPS). Just two years ago both these figures were in between £2-£3 per share.

Stephen Bailey, co-manager of the Liontrust Macro Equity Income fund, says for these reasons, plus an aversion to the oil and gas sector in general, his fund finished selling out of Shell in summer 2016.

Bailey adds that he believes the board of the company should rethink its dividend policy given that last year's payout was just 38 per cent covered, which 'represents a real risk'.

Speaking at an event recently, Bailey asked: 'Is there any sense in the board of Royal Dutch Shell maintaining this dividend, or should they perhaps be looking further down the road?

'In our experience we often see companies that rigidly stick to a dividend policy and are loathe to cut it and to us that constrains growth and we think it is also very damaging to the business model.

'As 2016 reminded us, we can start to begin to expect the unexpected - anything is possible. Shell is in a situation now where, if the oil price remains subdued or pulls back to a range of $35-$45, the question of cutting the dividend becomes less a question and perhaps more of a reality.

'We want to offer our investors a very secure growing dividend; we don't want to invest necessarily in companies where there's a risk to dividend maintenance or a risk of dividends being omitted.'

'BUYERS' MARKET'

It's certainly a debate that rears its head every now and again, with a number of fund managers questioning the wisdom of the high dividend. However, it remains highly unlikely that Ben van Beurden will want to be the first chief executive to cut the payout since World War II.

Bailey also remains sceptical of Shell's promise of a $30 billion asset disposal programme, which began last year and is expected to go on until 2018. The divestment aims to reduce the firm's aforementioned debt pile and has begun in earnest with $5 billion of assets already off the books.

Despite Bailey saying Shell's 29 per cent debt-to-equity ratio is 'starting to cause concern', he questions the sense of the policy because now is not the time to be selling assets. 'It's a buyers' market,' he explains.

'As we saw [earlier in January] the likes of Exxon Mobil, who don't have the same debt problems as Shell, actually went out and spent $6 billion on some very good North American oil assets.'

Shell performed impressively on a share price basis in 2016, with its 'B' shares - held by UK investors to avoid Dutch withholding tax of 15 per cent - rising by 50 per cent.

According to the Telegraph, the firm will announce on Thursday (2 February) a profit of $8.17 billion, more than double its $3.8 billion profit from the previous year, and analysts on the whole tend to have 'buy' ratings on the stock - due, of course, to its attractive dividend.


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