The Rising Influence of Rising Affluence

[DewDiligence]

Shell terminates shareholders’ option of receiving dividends in stock rather than cash:

http://www.sec.gov/Archives/edgar/data/1306965/000130901414000355/htm_8608.htm

It has recently been less attractive for Shell to buyback A shares rather than B shares due to Dutch dividend withholding tax effects. Cancellation of the Programme is anticipated to remove the Dutch dividend withholding tax costs for Shell on A shares being bought back. Accordingly, Shell will continue to opt for the line of stock for buy-backs that is the least expensive on an "all-in" basis, and it is anticipated that Shell will now be able to buy-back A shares again.

The impetus for today’s action was explained in #msg-101570911: Shell had been issuing (cheaper) RDS-A shares in lieu of cash dividends and then offsetting the dilution by buying back (more expensive) RDS-B shares, causing a negative arbitrage situation that reached materiality when the RDS-A discount to RDS-B widened to a record 8% recently.

Now that Shell will stop issuing new RDS-A shares and it can repurchase both classes of shares in the open market, the artificial supply-demand imbalance between the two share classes that was caused by Shell’s dividend/buyback policy no longer exists.

As a result, RDS-A is up today (+0.6%) while RDS-B is down (-3.7%), and RDS-A is now trading at only a 4% discount to RDS-B .

A discount of approximately 4% will likely remain because RDS-A dividends are subject to a 15% tax withholding by the Netherlands while RDS-B shares aren’t.