Royal Dutch Shell Plc is reviewing its scrip-dividend payouts after the gap between the prices of its two classes of shares widened to a record, making it costly for Europe’s biggest oil company to limit equity dilution.
The company has issued Class A shares as scrip dividend and bought back Class B equities to counter dilution of its stock since 2011. The spread between the two has risen to a record of about 170 pence, or a 7 percent premium for B shares. Shell has repurchased about $1.2 billion of B shares this year. About 47 percent of shareholders favored scrip dividend payments in the last three months of 2013, Shell said in its results April 30.
“We are not doing buybacks at the moment,” Chief Financial Officer Simon Henry said. “We do have a net 2 percent dilution of equity over the past few years and we need to consider that going forward.”
Shell created the Class A and B shares following the merger of Royal Dutch Petroleum Co. and Shell Transporting & Trading Co. into Royal Dutch Shell Plc in 2005. The Anglo-Dutch company, which has been examining plans to merge the two categories of shares, declared more than $11 billion in dividends and executed about $5.7 billion of buybacks in the past 12 months.
“Investors don’t like it” as it costs more for London-based investors to buy Class B shares, which are not subject to Dutch withholding tax, said Iain Reid, an analyst at BMO Capital Markets Ltd. While Shell’s Henry previously defended the scrip dividend program, “this time he didn’t defend it,” Reid said.
The new shares began trading on the London Stock Exchange, Euronext Amsterdam and the New York Stock Exchange as American Depositary Receipts on July 20, 2005. They differ in the way dividends and taxes are paid.
“Due to Dutch withholding tax rules, buybacks are currently limited to the B shares, for economic reasons,” Henry said. “We are working hard on solutions to give us the flexibility to buy back both A and B shares.”
Shell increased first-quarter dividends by about 4 percent to 47 cents a share from a year ago, it said April 30.
Class A shares rose 0.9 percent to 2,354 pence and Class B gained 1.1 percent to 2,533 pence in London.