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Income-seekers will be pleased to see a solid set of first-quarters results from oil major Royal Dutch Shell – not least as the company is the single-biggest dividend payer in the UK, with its forecast distribution representing around 13% of estimated payments from the FTSE 100’s members in 2018,‘ says Russ Mould, AJ Bell Investment Director.

For the last two years, Shell has been dogged by concerns that its $0.47-a-quarter dividend was at risk of a cut owing to a downturn in oil and natural gas prices – and earnings cover for the dividend is still thinner than ideal.

‘The consensus earnings per share figure of 173.2p ($2.43) compares to expectations of an unchanged dividend of 133.6p ($1.88), using a sterling-dollar cross-rate of $1.4075, for an earnings cover ratio of barely 1.30 times.

‘But it is cash that pays dividends, as shareholders in Carillion and Capita will know to their cost, and (odd as it may sound) profit is just one component of cash flow.

‘And once profit is adjusted for depreciation and working capital, and tax and capital investment are taken off, Shell generated some $6 billlion of free cash flow in the first quarter – a figure which covers the $4 billion quarterly dividend payment by 1.5 times.

‘That $2 billion margin of safety means that free cash flow has covered the dividend four times in the last five quarters (after a run of seven quarters when it did not).’


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