monabri wrote:Bree mentioned this announcement.? I'm surprised there has been no discussion.
viewtopic.php?p=443967#p443967"Royal Dutch Shell plc
Shell signs agreement to sell Permian interest for $9.5 billion to ConocoPhillips"
"The cash proceeds from this transaction will be used to fund $7 billion in additional shareholder distributions after closing, with the remainder used for further strengthening of the balance sheet.
These distributions will be in addition to our shareholder distributions in the range of 20-30% of cash flow from operations. The effective date of the transaction is July 1, 2021 with closing expected in Q4 2021."
Perhaps HYPers have been exposed to enough of such events to have realised that they tend not to be all that significant to small shareholders?
Basically, a company sells assets worth about N% of the company's total worth. Its earnings from the assets it retains are probably about N% lower as a result, and it finds that it hasn't any real use for the bulk of the sales proceeds, there isn't anything much that it can do with them other than keep them as cash earning low returns or return them to shareholders - so it decides to return them to shareholders. Its main choices for doing so are:
1) Pay out a special dividend unaccompanied by a share consolidation. For the individual shareholder, this looks good at first sight: money in the bank and they still have just as many shares as they did before. But with earnings down by about N% and the same number of shares in issue as they had before, all else being equal the company's ordinary dividends will need to be down by about N% on what it otherwise would have been, so the shareholder can expect their income from the holding to be down by about N%, and if the "all else being equal" applies to its yield as well, that means the capital value of the holding is down by about N% as well. Of course, that means that the shareholder can spend the special dividend buying their holding back up to about the same capital value as it had before, and that will roughly restore their income from the holding due to their increased number of shares roughly compensating for the lower dividend per share - but that ends up as an exercise in running fast to remain where you are...
2) Pay out a special dividend accompanied by a share consolidation. Earnings are still down by about N%, but so are the shares in issue, so the ordinary dividends per share can be expected to be unaffected and so can the share price. But the individual shareholder's number of shares is down by about N%, so their dividend income from the holding and its capital value can also be expected to be down by about the same percentage. Again, the shareholder can spend the special dividend to roughly restore them, but that's a case of running fast to remain where you are.
3) Buy back shares on the market and cancel them (or put them into treasury, which has pretty much the same effects). Earnings are still down by about N%, but so are the shares in issue, so the ordinary dividends per share can be expected to be unaffected and so can the share price. And assuming they don't sell, ordinary shareholders have just as many shares as they had before - but they also don't have any extra cash, so they're still where they were before, just without the 'running fast'. (Which isn't actually all that fast if the shares are tax-sheltered - just some unwelcome but pretty small trading costs incurred. If they're not, Income Tax on the dividends in options 1 and 2 can be more of a problem.)
From the taxation point of view for unsheltered holdings, buybacks are better than the dividend options, as dividends can force shareholders to be taxed when they would have preferred not to be. But buybacks carry the risk of the company overpaying for the shares to get the job done, and such overpaying is to the advantage of those who sell into the buyback and the disadvantage of those who don't. If that happens, it's a choice of not selling and being disadvantaged by that effect, or selling and having to deal with CGT...
There are a few other options such as tender offers (which are basically buybacks, but done by directly offering to buy the shareholders' shares rather than using the market) and B share schemes: the capital-return-only type still work, which are like dividends (including having the options of being accompanied by a share consolidation or not) except that the tax they may trigger is CGT, not Income Tax. But like options 1-3 above, they can all be expected either to reduce the capital value and future ordinary dividend income of holdings while delivering cash roughly equal to the capital value reduction to the shareholder, or leave the capital value and future ordinary dividend income unaffected while not delivering any cash to the shareholder. And shareholders can easily change one of those possibilities into the other by buying or selling on the market...
So at this point, when the company has done the deal that leaves it with surplus cash to return to shareholders but not yet decided how it intends to return it, there is very little HYPers can do in practice about it - contacting investor relations to ask the company to go for the cash-return mechanism they prefer is one, though their views will almost certainly be swamped by those of large shareholders, and the other I can think of is that if they have cash to invest in more shares in both tax-sheltered and unsheltered accounts and want to invest both in RDSB and other companies, it would probably be a good idea to buy the RDSB in the tax-sheltered account to avoid the possibly imminent larger-than-usual taxation event.
Of course, there is also the question of whether the company has done a good deal, and that question may well be interesting, but the practical reality is that it
has been done and nothing looks at all likely to change that.
Gengulphus
