Shell's Dividend Bombshell

Published in Company Comment on 23 September 2010

The oil giant replaces its DRIP scheme. Are you going to lose out?

An announcement late last week by oil company Shell (LSE: RDSB) has so far caused relatively few ripples among private investors. As time goes by, I suspect that might change.

In the short term at least, it's possible to view Shell's announcement as moderately investor-friendly towards UK shareholders, many of whom buy the high-yielding oil company's shares for their income-generating properties. In the longer term? Well, judge for yourself.

Briefly, what the company has done is to make a change to its existing DRIP -- or dividend reinvestment plan -- scheme, whereby shareholders can elect to take their dividends as shares, rather than as cash.

For investors who don't actually need dividends to live on, DRIP schemes are often popular, because they are a relatively painless way of building up a stake in a company, free of commission and dealing charges.

And the Shell scheme certainly ticks those boxes, as the company stressed when I spoke to it yesterday. Other boxes, though, are most definitely left unticked.

Goodbye DRIP, hello scrip

So what exactly has Shell done? Briefly, from the private investor's perspective, the changes look like this:

  • The existing DRIP scheme -- in Europe, the UK and the United States -- is being scrapped, with effect from the third quarter interim dividend for 2010.

  • It's being replaced by a scrip scheme: instead of the company buying its shares in the open market and handing them to investors, it's simply going to create new ones. So investors who don't take up the scrip option will see their stake in the company gradually diluted.

  • Here in the UK, investors generally hold Shell 'B' shares, rather than Shell 'A' shares, where dividends are denominated in euros (although optionally payable in sterling), and are subject to Dutch withholding tax at 15%.

  • But under the new scrip scheme, all newly-issued shares will be 'A' shares, even if the original holding was in 'B' shares. The award of those shares won't be subject to Dutch withholding tax, though, as the dividend is not being paid in cash.

  • And shareholders electing to receive the new 'A' shares will not be subject to any further UK tax -- even higher rate taxpayers. How so? Because under current UK tax rules, new shares received under the scrip programme will be treated as a non‑taxable capital receipt, rather than income.

What's not to like?

Well, quite a few things, actually. And although the pages and pages of information I've waded through certainly don't set out to hide anything, their very length -- and some occasionally impenetrable jargon -- does little to help private investors figure out the best course of action.

So here are a few nuggets to mull over:

  • Quarterly dividends will in future be payable seven business days later than at present, due to the need to calculate an average trading 'strike price' for the scrip offer.

  • Irrespective of that strike price, the acquisition price for capital gains tax purposes will be the original cost of the original shareholding -- the logic being that the new shares are free.

  • Unless you participate, your stake in Shell will be diluted.

  • Investors will now have two holdings to manage. The scrip offer has to be elected for twice, for example: once on the original 'B' shares, and again on the new 'A' shares. And when selling, dealing costs are doubled.

  • Investors wanting to discontinue their participation in the new scrip programme and revert to cash dividends will now have to pay Dutch withholding tax at 15%. In other words, as the lengthy Q&A document explains, a £90 dividend will be paid as £76.50 -- leaving the taxpayer to try and reclaim the missing £13.50 through their tax return, via the UK's double taxation treaty with the Netherlands. At the very least, this is additional paperwork and delay.

The bottom line

Higher-rate UK taxpayers not reliant on Shell dividends for their immediate income needs probably have cause for celebration. At a stroke -- at least, on my reading of the rules -- they're gaining through not paying additional tax on their dividends.

But other shareholders are losing out: if they don't join, their stake in the business is being diluted; they're incurring delayed payment of dividends, whether they join the scrip programme or not; there's a double (and possibly unwanted) holding of 'A' shares to manage and sell; and -- most importantly -- 15% Dutch withholding tax to pay on dividends earned on the new shares if they subsequently elect for cash dividends.

So there we have it. Good news or not? Comments? Complaints? Criticisms? That's what the box below is for!

More from Malcolm Wheatley:

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dhorsley 24 Sep 2010 , 8:14am

Investors wanting to discontinue their participation in the new scrip programme and revert to cash dividends will now have to pay Dutch withholding tax at 15%.

Presumably only on the divi on the A shares acquired through the Scrip program. The divi on the pre-existing B shares will still be free of dutch task?

I won't be joining the scheme (can't work out how for one as my shares are held in a crest account) due to the complication of the A shares

MDW1954 24 Sep 2010 , 8:56am

That's right: 'B' shares are free of Dutch tax. The second link in the article talks about Crest, and I've seen other Crest-specific information on the Shell site. Shell shareholder relations might be able to advise -- try here:

Malcolm (author)

dhorsley 24 Sep 2010 , 9:39am

I read through the Q and A linked to in the original RNS and in the bumf that came in the post and on CREST it said "To join the Programme you need to submit a CREST Dividend Election Input Message" which is meaningless to me (perhaps I'm just stupid or I need to contact my CREST sponsor). I don't want to join due to the A shares situation so its not a problem.

Hopefully they'll deal with it aswell as SSE, they recently changed to a scrip scheme from a drip and today the divi appeared in my bank account, so they have remembered my bank account details from before I joined the drip.

gullibleinvestor 24 Sep 2010 , 9:48am

"Unless you participate, your stake in Shell will be diluted."

Presumably the reduction in the percentage of the company's shares that you own represents exactly the same impact you would have suffered in NAV had the company paid the dividend as cash (or, as in the DRIP scheme, as cash to those who wished to sell shares which are then handed out to remaining shareholders).

dhorsley 24 Sep 2010 , 10:10am

With the drip scheme holdings weren't diluted as shares were bought in the market to fulfill those taking part in the drip, and they increased their % of the company wrt those take the divi as cash whose % of the company remained unchanged.

503 24 Sep 2010 , 12:22pm

Thank you for this article - it's interesting and useful.

For me, the complexity of the CGT calculations involved rule out participation in the scrip scheme, as they do for DRIP schemes.

The Dutch withholding tax, and extra dealing costs on sale, from having A shares as well as B, are hardly welcome but the nightmare of dealing with CGT one day, after years and years of having 4 "purchases" a year is a total show-stopper.

The point about dilution is interesting. Effectively there's going to be a placing of new shares at the same time as each dividend payment, with the new shares being taken up by those who join the scheme. As your recent article
pointed out, Shell is suffering a little cash flow stress at the moment. Presumably this scheme is intended to help reduce the cash cost of dividends, and alleviate this a little. Better this than a cut in the dividend.

CPRmachine76 24 Sep 2010 , 2:15pm

Hi Malcolm,

Thanks for the article, which has opened my eyes to something of which I was completely unaware.

If I were to opt for the scrip issue instead of taking cash dividends, would I also have to pay the Dutch Government tax if I should sell my Dutch 'A' shares in the future ?

Obviously such a cost would be unwelcome.


FlyingSpur 24 Sep 2010 , 2:24pm

With DRIP schemes you pay dealing charges; with SCRIP schemes you do not.

FXEconomist 24 Sep 2010 , 2:35pm

Was considering Shell shares. Now too complicated. More like hell shares.

goupillon 24 Sep 2010 , 4:54pm

I thought Shell were "cash rich" and so why are they doing this? Are they really preparing a bid for BG Group and need more cash to do this?

Dozey1 24 Sep 2010 , 6:38pm

"...Are they really preparing a bid for BG Group and need more cash to do this?"

goupillon: I hope this is the case because BG is one of my largest holding; well managed and getting on with the business without jigory pokery. I shall not be shelling out for Shell.

MDW1954 24 Sep 2010 , 6:59pm

Hi there CPRmachine76,

On my reading of the document, no, but as always: DYOR!

Malcolm (author)

DunedinInvestor 27 Sep 2010 , 8:47am

Dutch withholding tax

Malcolm, you have suggested in the last bullet point under “What’s not to like” that a basic rate taxpayer may seek repayment of part of the 15% Dutch withholding tax levied on dividends from A shares. I think that the position is as follows-
• The general rate of Dutch withholding tax on dividends is 15%.
• The rate permitted by the UK/Netherlands double tax treaty is also 15%. This is covered in Article 10(2).
Accordingly it is not possible to reclaim any part of the withholding tax from the Dutch tax authorities.

doomwatch 29 Sep 2010 , 10:11pm

Sorry but I must be missing the obvious:- british shareholders tend to buy 'b' shares which pay dividends in euros. Why? is 15% tax in place of our own (which is not reclaimable) or are people gambling on exchange rates?

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