How Company Treat Shareholders in Change of Dividend Policy?

Due to the impact of Covid-19 pandemic, a lot of companies are considered to curtail or delay their dividend to shareholders, to keep the company afloat in the situation of declining revenues. The shareholders should regard this as normal because everyone’s dividends are affected in some extent, however, for the shareholder of Royal Dutch Shell, one of the world’s largest dividend payers, they did not think so. Royal Dutch Shell cut its payout in April for the first time since the second world war. Jessica Uhl, chief financial officer at Shell, reiterated that the dividend cut was the “prudent and appropriate thing to do” and reflected the “real reality” presented by the pandemic. These explanations seem are feeble for its shareholders and drew criticism, the reason is the Shell company did not provide information on how it planned to allocate capital in the coming years.

 

Cut dividends that have not changed for years, and unknown capital allocation in the future, I believe Shell’s actions not only undermined the original plan of its shareholders, but also put their capital into an unknown state. This situation is like, you have an appointment with someone to go to coffee every day at noon, take a cup of coffee, refreshing yourself for a better work in afternoon, but the guy suddenly said one day, “Sorry, I may not be able to have coffee with you every noon from tomorrow, but you still have to wait for me where we have agreed.” After that, your afternoon work status depends entirely on whether this guy comes to accompany you for coffee, and you may be fired by your boss because you may not be able to work well due to a lack of noon coffee. From the shareholders’ point of view, Shell’s company set their capital into a strange path, where does this path lead, to heaven, to hell, or to the maintain the status quo, shareholders do not know yet. If I were a shareholder, I would also not be happy with Shell’s decision like this: “I am giving you my money and you are not telling me what you are going to do with my money. What is the difference between this and gambling?” Capital is risk-averse, and shareholders use their judgment to avoid losses, yet Shell company not giving shareholders a chance to judge. For shareholders, capital that would have provided a steady stream of income is now unstable, and it is natural to criticize the company.

Yet one of the Shell company’s rival, British Petrol, did well in its dividend policy. BP cut half of its dividend in pandemic and told its shareholder this cut is rebasing of the payout to a more “resilient” level and said that it would remain fixed and for the investment for new energy. More important to shareholders, BP tell them the plan in the future: it would commit to returning at least 60 per cent of surplus cash through share buybacks once its net debt falls to $35bn. Well, that guy is still told you that he will not coming to have a cup of coffee in the next few days, but you do not have to waste time waiting for him at the appointed place, and he decided to make it up to you, so he promised to buy you coffee in the whole next week. Now the shareholder should feel at ease, with a clear destination of path, although the lost is temporary, they will get assumptions.

 

Compare with two companies, both cut the dividend, Royal Dutch Shell takes no hints to shareholders of why and set its shareholders in an unstable situation, the company drew the criticism; British Petrol explain to its shareholders and make a promise to make compensations, I think the shareholder will show an understanding attitude. The company change dividend policy not only will send a signal to market what is the situation of company now, but also relevant about shareholders. When companies make change in its dividend policy, it is necessary to let shareholder understand why, and tell them the plan. After all, a portion of a company’s capital belongs to its shareholders.

References

Mooney, A., & Raval, A. (2020, August 1). Schroders chief accuses companies of unnecessary dividend cuts. Retrieved from Financial Times: https://www.ft.com/content/3749e3c5-265b-4064-9f9a-de25f5366255

Raval, A. (2020, August 4). BP halves dividend as Covid-19 turmoil pushes oil major to loss. Retrieved from Financial Times: https://www.ft.com/content/02ffb194-2e8b-4408-807e-ee8b3d17b280