Shell shareholders set for cash bonzanza after oil major scraps scrips

Suzie Neuwirth
(Source: Getty)

Royal Dutch Shell announced this morning that it is cancelling its scrip dividend programme, after tax issues in the Netherlands meant that costs started racking up for the Anglo-Dutch oil major.

The FTSE 100-listed firm introduced the programme in late 2010, as a means of conserving cash, but analysts estimate it cost the company between $150m (£88.9m) and $450m last year.

Investec went so far as to call the programme “a high-profile source of embarrassment” for the firm.

For those of you in need of a memory jolt, scrip dividends are when companies give investors the option to receive their dividend in the form of new shares, rather than cash. Such programmes are popular with oil companies (BP and Repsol have them as well) who don’t have enough cash to fund their mega-capex plans as well as the bumper dividends their investors demand.

It seems that shareholders like them too – take-up of Shell’s scrip dividend programme was more popular than expected, with 47 per cent choosing shares over cash late last year.

The reason Shell fell into particular issues is because it has a (rather complicated) dual-share structure. When stakeholders started accepting new shares like crazy, Shell decided to restart its share buyback programme in mid-2011 to offset the equity dilution. But due to Dutch tax rules, Shell was only able to issue new scrip shares in the A-class and could only buy back B-shares.

As a result, Shell was issuing new A-shares at a discount and buying back B-shares at a premium, causing a growing disparity between the two share prices. Last year, this difference was around four per cent, but that soared to 10 per cent last week.

(Source: Barclays Research, Datastream)

Shell said today that it expects buy-backs to offset the dilution created by scrip dividends by the end of 2015, with around 135m shares currently outstanding. Once the share prices settle, this should be good news for shareholders.

“On our calculations Shell already has the highest free cash flow of the sector and unlike its big oil competitors has not been through large restructuring programs,” said Barclays research.

“Given this strong starting point, growing free cash flow, a divestment program of $15bn over the next two years and a strong balance sheet, we believe any incremental cash will most likely be returned to shareholders.”

It is thought that peer BP – which only offers one class of shares – is not experiencing any similar issues with its own scrip programme.

BP declined to comment.

Related articles