Neil Collins’ Notebook – No time for Shelling out

We are all shareholders in Shell, one way or another. Staple holding of pension plans, income funds and buy-and-forget investors, Royal Dutch Shell provides nearly 7pc of the total dividends paid from London’s listed companies. It has paid out reliably for over half a century, and even managed a small increase in 2014.

A cut is unthinkable, surely. Last week’s update from the management, explaining the strategy to cope with oil at $25 a barrel conspicuously failed to mention the dividend. Rather, we were invited to consider the efficiency savings, cancelled projects and postponed share buyback programme.

Ah yes, the buyback programme. The first $15bn of a proposed purchase of $25bn of its own shares is now completed at prices (as Shell did not say) more than twice today’s. If ever there was a purblind programme to just keep buying until the money was all gone, this is surely it. Now the collapse of the oil price means the company is no longer earning the money to pay the dividend.

Shell can easily find the $15bn cost by borrowing. Indeed, the analysts at Berenberg reckon that it would take two years of low oil prices and unchanged payout before the debt started to get painfully high. The more interesting question is whether this is the best course for the business.

A dividend that is not earned is essentially a repayment of capital, however disguised, and beyond a certain point continuing to pay it by borrowing is seen as a mark of weakness, not strength. The perception of a weak balance sheet has been close to catastrophic for companies in this month’s market meltdown.

Besides, failure to pay a dividend does not leave shareholders poorer, since the money is not lost, but stays in their company. The Shell share price has taken a terrible beating as the environmental fringe painted oil companies as evil, the clash of egos in Saudi Arabia and Russia poleaxed the oil price, and now coronavirus has dealt a blow to demand.

At £13 Shell shares (historically) yield 12 per cent, a signal that either the share price is wrong or the payout is not sustainable. Of course, OPEC peace may break out before we all drown in crude oil, and the virus will eventually be defeated. Until then, Shell would be well advised to suspend the next dividend payment. The directors might award themselves pay cuts to show they share the pain. Oh, and please, no more buybacks. You are paid to run the business, not to double-guess the stock market.

A rare chance to shine for the FCA

You should have had a letter from your broker, fund manager or whatever bearing the bad news that your portfolio has fallen in value by more than 10 per cent (some of us have had two). The senders enjoyed sending the letters out about as much as you enjoyed receiving them, with the added bonus to them that printing and stuffing envelopes is impossible to do from home.

This may not be the principal reason why so many of us voted to leave the European Union (remember?) but this pointless, and perhaps dangerous, piece of bureaucratic nonsense is a direct result of MIFIDII, that near-incomprehensible valedictory shot from Brussels targeted at the City of London.

One day, maybe, the Financially Supine Authority will notice the misery this directive is causing, and do something to ease it. Today would not be too soon, given the clear and present danger from the virus. Simon Ray of Cyan Wealth Solutions has written the FCA a stinging letter asking for relief from this potentially fatal requirement.

It’s all in the sacred name of consumer protection, like the four documents totalling 56 pages that a new client of brokers Rathbones is obliged to complete. The gems include: Why are your investing? followed by “Please do not leave this question blank.” No wonder so many give up and leave their money in the bank, earning nothing.

Fair weather friends

So farewell, Amigo, it has not been nice knowing you. Thus Shore Capital, throwing in the towel on coverage of this borderline immoral and now almost worthless lender.  Amigo’s founder, James Benamor, describes the company’s decline since he quit last year as a “slow motion suicide“, but for him at least, it’s a relatively painless one.

He has £278m in his pocket from the flotation at 275p a share less than two years ago, and still owns 61 per cent of the business. At today’s 14.5p he could buy the rest for less than £20m, although he does not appear to be rushing to do so. It’s worth reminding ourselves of the advisers who said Amigo was worth £1.3bn just a few short months ago. Step forward JP Morgan Cazenove, RBC Capital Markets and Macquarie Capital. Or more likely, don’t.

Neil Collins used to write the Inside London column for FT Weekend for many years, and before that was City Editor of the Daily Telegraph. 

He writes a Friday blog at neilcollinsxxx.wordpress.com