SHELL STOP PAYING
Royal Dutch Shell said it would no longer pay dividends in the form of shares, a move that analysts said could lead to much higher share buybacks by the company.
The company said cancelling the scrip programme from the second quarter of this year and settling all future dividends entirely in cash "will allow for a more efficient share buy-back programme".
Shell has been issuing Class A shares as scrip dividend for nearly four years. It has also been buying back shares to offset the dilution of its stock.
But its A shares are subject to Dutch dividend withholding tax, so it was forced to buy back B shares instead. As a result, the spread between the two has been rising, reaching 10 per cent last week.
Having to buy back the more expensive stock cost Shell some $450m last year, according to RBC Capital Markets.
Cancelling the scrip programme means Shell will be exempt from the withholding tax, meaning it can now start buying back A shares again.
Lydia Rainforth of Barclays Capital said she expected the A-B spread to fall sharply, to just above 4 per cent.
She said suspending the scrip offering also gave Shell "significant flexibility to return additional cash to shareholders in the medium term".
The company said it intended to continue with share buybacks, subject to share price considerations and the capital requirements of the group.
It said there were still some 135m shares outstanding from the scrip programme, and it would buy these back by the end of 2015. Jefferies estimates that amounts to an additional $5bn in returns to shareholders over the next two years.
Analysts said the cancellation of the scrip programme indicated Shell was more confident about its cash flow position.
In a March strategy presentation, the company suggested it had the potential to generate between $48bn and $51bn of operating cash flow by 2015/16 – far more than its dividend and capital spending programme combined, meaning it would have healthy free cash flow.
Adding the $15bn divestment programme it is planning over the next two years, "we see plenty of room for increasing cash returns to shareholders", Ms Rainforth said.
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