The Most Un-Sustainable Dividends In The Market

What’s the most un-sustainable part of the global energy complex?

Maybe you would say co-ordinated OPEC production cuts.

Or perhaps you would bring up high growth rates of shale producers.

If you talked about the lack of free cash flow among shale producers you would be getting warm…

But for me, when I went looking through the final 2016 financial statements of the supermajors, their dividends seemed the most un-sustainable part of the industry. That should make shareholders very nervous.

What these year end financials show is that these companies have spent the last two years continually digging a balance sheet hole. 

With the commitment that they have to their dividends it doesn’t look like they will be putting their shovels down any time soon.

Law of holes - The first law of holes is an adage which states that "if you find yourself in a hole, stop digging". Meaning that if in an untenable position, it is best to stop carrying on and exacerbating the situation

Behind The Numbers – Those Dividends Are A Heavy Burden

The largest oil companies and their dividend yields are as follows:

Exxon (XOM: NYSE) – 3.60%

Chevron (CVX: NYSE) – 4.11%

BP (BP: NYSE) – 7.12%

Total SA (TOT: NYSE) – 5.24%

Royal Dutch Shell (RDS-B: NYSE) – 6.97%

These companies have long taken great pride in being able to maintain their dividends through even the worst of oil crashes.

Exxon for example has 34 years of consecutive dividend increases. Chevron has increased its dividend for 29 consecutive years.

That is very impressive to be sure.

However, when I drill into the 2016 financial statements of these companies I don’t find myself wondering if they should continue to increase dividends.

I find myself wondering if they should continue paying dividends.

In the table below I’ve laid out the 2016 cash inflows and outflows for each of these companies. 
 

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