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A Closer Look at Royal Dutch Shell Plc (RDSB)’s Dividend Potential

Royal Dutch Shell plc (ADR) (NYSE:RDS.A)LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Royal Dutch Shell Plc (LON:RDSB) and assessing whether the company is an appetizing pick for income investors.

How does Royal Dutch Shell’s dividend history stack up?

2009 2010 2011 2012
FY Dividend Per Share 168 U.S. cents 168 U.S. cents 168 U.S. cents 172 U.S. cents
DPS Growth 5% 2.4%
Dividend Cover n/a 1.8x 2.7x 2.5x

Source: Royal Dutch Shell Company Accounts

Royal Dutch Shell Plc (LON:RDSB)’s severe revenues collapse in 2009, prompted by the geo-financial crisis at the time, caused earnings per share (EPS) to slide more than two-thirds. The company raised the dividend modestly that year, although it kept shareholder payout growth on hold until last year despite recovering earnings. Last year’s rise was initiated after it successfully completed the first stage of its growth plan, which runs to 2015.

Dividend cover has fluctuated during the last four years, although it has since steadied comfortably above the widely regarded security benchmark of two times forward earnings.

What are Royal Dutch Shell’s dividends expected to do?

2013 2014
FY Dividend Per Share 176 U.S. cents 181 U.S. cents
DPS Growth 2.3% 2.8%
Dividend Cover 2.3x 2.3x
Dividend Yield 5% 5.2%

Source: Digital Look. Exchange rate: £1=$1.51507

City analysts expect EPS to decrease 5% in 2013, with a modest 1% bounce-back penciled in for next year. During the period, shareholder payments are expected to keep nudging higher, with dividend cover still well ahead of two times prospective earnings.

Royal Dutch Shell Plc (LON:RDSB) announced earlier this month that profits rose to $8 billion in the first quarter versus $7.7 billion in the corresponding 2012 period, even though revenues slipped to $112.8 billion from $119.9 billion last year. Oil production advanced 2% on an annual basis to 3.6 million barrels of oil equivalent per day.

Promisingly, the solid first-quarter performance prompted Shell to raise the Q1 dividend 5% to 45 U.S. cents. Additionally, the company’s ability to throw up plenty of cash is also facilitating a massive share repurchase scheme, and Royal Dutch Shell Plc (LON:RDSB) repurchased $1.2 billion worth of shares as of the end of April.