Standard Life - 73p Cash Payment But .......

bowlhead99

AMG_Merc wrote: »

I now have over 600 less shares - assuming the share price is roughly the same as before - how can the value of my shareholding not be reduced?

Different things happened all in a row.

1) Standard life announced that they wanted to sell a canadian division and receive $billions for it and that if approved, they would send £1.75 billion of cash back to their investors while using the rest of the funds within the business

2) This good business move improved the total value of the company in two ways. Firstly the announcement signalled the fact that they would turn their assets into a greater amount of cash than the assets had been worth. Secondly their investors thought it was a sign of a good efficient company, demonstrating that the directors are going to be focusing on doing what the company is good at and selling off the bits that can be sold for more money than those bits are actually making in profit.

3) They also released some decent annual accounts, and all the votes were passed with massive majorities, and the industry regulators approved the sale, so the market gave this information due consideration, together with the fact that shareholders would soon be taking out a big pile of cash from the company, and decided the shares in the company were quite valuable, causing them to trade in the £4-£5 range even though they had been less than £4 before the Canadian sale was proposed in early September.

4) The company prepared to send its 73p per share to its investors and asked them what format they would prefer (dividend or capital return, maximising tax relief for each investor). Offering these choices is another thing that helped the share price go up before the distribution, because it meant that people lost as little of the 73p as possible to tax.

The idea was that after all the transactions are complete, the company would have received $billions in from Canada, then paid out billions of 73 pences to investors. The company would become a bit more valuable because of giving up the Canadian assets for the good price that the buyer would pay, but overall it may be less valuable after it has given most of the resulting cash out to investors. Most of the value of the Canadian business that it owned will now be physically, directly in the hands of its investors.

5) So, the company paid out all the 73 pences to investors. If you previously had a share certificate representing your ownership of a company with £billions in its bank account and a stated intention to send you 73p, and then the next day the company actually sends you the 73p and no longer has the £billions in its bank account, then the value of the share in that company is going to 'plummet' in value.

It cannot possibly be worth as much as it was worth the day before. Overall, the value of the shares you are left with, plus the 73p in your hand, will hopefully be as good or better than the 380p your shares were worth back at the start of September '14 when they first announced they would do all this. But the share value itself at the time they say the dividends officially become payable will fall by a very large percentage chunk because all of a sudden the company has paid out its assets to its owners.

So, that happened.

6) Then the next thing that happened, although it was immediate, was that the company adjusted the number of shares in issue. It picked up everyone's share certificates and gave everyone fewer share certificates back. Everyone still kept the same % ownership of the company that they had on the previous day. But they just have a different number of shares.

If you previously held 11000 shares they could have given you back 11,000,000 shares, making the market price of each share a thousand times lower, or they could have given you back 11 shares making the value of each of them a thousand times higher. Each of those scenarios wouldn't change the value of the pile of shares you hold, or the percentage ownership of the company that it represents, it is just an arbitrary figure. But it changes the price that each share is trading at on the market.

What they did was, change the number of shares downwards a bit, so that instead of printing 11 or 11000 or 11000000 on the certificate, they printed 9000. The drop from 11000 to 9000 shares in your hand, will make each of them trade at an individually higher price, although they are still worth the same total. But the effect is that the increase due to the consolidation will very roughly cancel out the effect of the shares dropping in value at step 5 when the dividend was paid.

It won't exactly offset it because when they were planning this they didn't know the exact trading price of the shares. But generally the share price ends up being closer to what it had been immediately before the dividend, than if they had not adjusted it and watched it drop 73p when the 73p dividend started to leave the company bank account.

So the steps are
1) company announces Canada sale and return to investors

2) price goes up, value goes up, because of the above

3) price and value continue to go up because of good announcements, passed votes, regulator approval

4) company prepares dividend and paperwork, no real change to price or value

5) company sends dividend, reduces price and value for company, no affect on total value to investor (who gets cash in his hand but lower value of shares)

6) company changes number of shares held by each investor, no affect on value, but increases price, cancelling out the price change in (5)

Step 6 is known as a 'consolidation'. It reduces total shares in issue and changes the price upwards but does not affect value. It is the opposite of a 'split' which would increase total shares in issue and changes the price down but does not affect value.

The purpose of step 6 is to aid comparability. People thought of Standard Life as being worth £4 or more on a good day, and paying out x pence of dividend a year on every share. If you let (5) happen - making the company smaller by giving cash to investors - then on the same sort of 'good day', they will no longer be trading at £4, they would be £3-odd. And the usual dividends per share, if there were the same amount of shares in issue, would no longer by x pence they would be some lower y pence. This is a headache for some investors as it means nothing is comparable with what it used to be. By doing a share consolidation, changing the number of shares downwards, the numbers can be a bit more comparable with historic figures, even though the company is fundamentally smaller because it sold Canada and put the value in the hands of the investors.

The action of doing the consolidation in step 6 does not change value. Selling Canada made value go up a bit, while giving investors the resulting assets made the value go down a lot (although the investors get that value in their hands as cash). The separate action of changing quantity of shares on everyone's certificates does nothing to value.

Consolidating the number of shares is just window dressing to help people compare figures from one year to the next or against other companies. For example if SL was 450p and BP was 450p one month, and then you saw the next month that SL had dropped to 385p, you would think "wow, holy !!!!, SL has dropped like a stone it must be way worse than BP which has gone up from 450p to 455p". But SL had only dropped because investors took cash out and it doesn't imply it performed badly at all, people may get confused. So, they artificially tweaked the share price by changing the number of shares.

Today SL is trading at 480p and BP at 440p. BP is worth £80bn and SL worth £10bn. So as you can see, the share prices are artificial, they are just a function of how many shares we say are in issue at a point in time.

AMG_Merc

bowlhead99 wrote: »

Different things happened all in a row.


It cannot possibly be worth as much as it was worth the day before. Overall, the value of the shares you are left with, plus the 73p in your hand, will hopefully be as good or better than the 380p your shares were worth back at the start of September '14 when they first announced they would do all this. But the share value itself at the time they say the dividends officially become payable will fall by a very large percentage chunk because all of a sudden the company has paid out its assets to its owners.
the number of shares.

Many thanks for a comprehensive response bowlhead :T


The paragraph above hits it spot on. And, couched in words I could understand. Why didn't SL create an FAQ to explain this in a similar way for its investors I wonder.

boo-hoo

I opted to receive my payout as shares but I have now been sent a cheque and told they can't do it as shares. Why did they give me the option if it wasn't a possibility? Am I missing the point somewhere?

Spidernick

Yes, as the option was to receive money whatever happened, never reinvested shares. You could just choose it as a capital gain (as I did as a higher-rate taxpayer with no other gains in the year and so no extra tax to pay) or as income. Perhaps you were thinking of the former and confusing the format?

bowlhead99

boo-hoo wrote: »

I opted to receive my payout as shares but I have now been sent a cheque and told they can't do it as shares. Why did they give me the option if it wasn't a possibility?

They didn't give you the option as it wasn't ever a possibility.

Am I missing the point somewhere?

They have a dividend re-investment programme (DRIP) for when people receive a few pence of dividends every so often. This time they were going to distribute almost a fifth of the value of the company out to their investors and so it was highly likely that people wouldn't want their standard re-investment elections to hold for this one-off exercise.

Also, even if some of those investors (such as yourself) would have liked to use the DRIP, it wouldn't help them achieve their objective, which was to get £1.75bn cash out of the company. Issuing new shares to investors was the exact opposite of what they were trying to achieve. If you think it's the best company on the planet to be invested in, and you'd like to buy some more shares with your proceeds, you're welcome to go and buy them off other people on the open market. The company doesn't want to issue more shares and take your money.

They explicitly said in the documentation they sent you that the DRIP wouldn't apply to this shareholder return and that if you were signed up to that scheme you would just get a cheque for this event. It was in the FAQs. They didn't ever offer any opportunity to get new ordinary shares in this process. Only to be given C shares which would pay a dividend and then immediately be redeemed, or to be given B shares which would immediately be redeemed for 73p.

Thrugelmir

AMG_Merc wrote: »

The paragraph above hits it spot on. And, couched in words I could understand. Why didn't SL create an FAQ to explain this in a similar way for its investors I wonder.

Investors determine the market price of a Company's shares, i.e. what a company is worth. Not the responsibility of the Company to give financial advice or guidance in this regard.

sabretoothtigger

AMG_Merc wrote: »

[/SIZE][/FONT]
I’m not a total financial idiot but I thought that by voting for the Canadian sale I would be getting 73p per share in addition to my holding and not after reducing its value – so yes, a “windfall”.

On the good side, Warren Buffet would shake your hand on such a point. Why would a company pay a dividend and be worth less, his main shares for his company have never paid out for this reason.

It is worth less because UK tax deducts worth from the payout. If the company just holds the money and its in the price then you get the full worth then.
You can always just sell the share and use the money that way - capital gain over income.

I prefer scrip dividends if you ever spot the choice for those. Shell did some issue like this recently, it was far better to take shares especially as oil price was at a low then.

I know its an old thread but its a reoccuring theme

bowlhead99

sabretoothtigger wrote: »

On the good side, Warren Buffet would shake your hand on such a point. Why would a company pay a dividend and be worth less, his main shares for his company have never paid out for this reason.

It is worth less because UK tax deducts worth from the payout. If the company just holds the money and its in the price then you get the full worth then.
You can always just sell the share and use the money that way - capital gain over income.

I prefer scrip dividends if you ever spot the choice for those. Shell did some issue like this recently, it was far better to take shares especially as oil price was at a low then.

I know its an old thread but its a reoccuring theme

Berkshire Hathaway is a huge conglomerate that has, say, an insurance business - but also then when it has some spare cash from an asset disposal it will go and buy a minority interest in the share capital of a completely different and unrelated business that it can't control. So it owns some billions of dollars of CocaCola and some Wells Fargo bank and some IBM, some Kraft/Heinz foods, and maybe from time to time some Tesco and a railroad and whatever etc etc.

People know that if you buy a share of BH, you are NOT buying into a specific business in a particular business sector with a board of director accountable for steering that ship in that sector, but instead you are buying into an investment company, and the main board are being employed as investment managers, stewards of the investment portfolio.

Investors in this Buffett vehicle want him to build them a diversified portfolio held over time (which is what he's good at) and they don't want to take taxable dividends out of it because they would only reinvest those proceeds into their diverse portfolio of investments, and quite likely into Buffet's portfolio because they trust him. So giving his investors the cash he generates is self-defeating: might as well internally reinvest it in some other good-value but entirely unrelated company, as part of the investment portfolio which his investors mandated him to build.

However when you own a share of Standard Life or Shell or a Buffett investee such as IBM, operating in a specific part of a specific industry, and it generates surplus cash from operations or asset disposals, the Board should NOT think "hmm, I want to save some of my investors some income tax and keep their money at work, so I should reach beyond my mandate and skill set and make a strategic acquisition of a minority stake in Coke or Wells Fargo. Then my investors will remain fully invested, in something that they *might* want, which is a business that does 80% insurance and 10% banking and 5% soft drinks and 5% baked beans".

That would be ludicrous. If you are a board of directors with a cash surplus you can't practically use in something that generates at least the same return as your core business and is somewhat related to your core business, you should give it back to the investors - the owners of the business that you're looking after - and let *them* decide what to do with *their* money. Which might be to buy more shares in your business and concentrate their wealth in your remaining projects, or it might be to invest in other businesses with different profiles.

For some, there will be income tax on the dividends, but major institutions such as pension funds, government bodies etc, do not pay income tax anyway.

Bottom line, retaining cash to buy a new investment works for Buffett's investment portfolio business but it often doesn't work for most others. He speaks a great deal of sense but you can't extrapolate everything he says to other parts of capitalism just because he's a clever bloke.

For example, he famously says that when he dies, his wife should invest her money in an S&P tracker. Simple, cheap, good return, don't need to spend money on an asset manager or an investment thesis or try to stock pick or time the market. By contrast, his investors employ him and a team of asset managers to stock pick and make decisions on timing and value.

So when Standard Life or Shell generate profits or have excess capital proceeds, should they put that into an S&P tracker rather than paying a dividend? Or make a strategic investment into an opportunity closer to their existing insurance or oil business, despite it having sub-optimal characteristics? Or just pay us the damn dividend?

The decisions will be different for a mature business like Shell or SL than they are for a new and growing start-up, obviously. It is recognising these differences that can help avoid acting on unsuitable generalisations.

Thrugelmir

sabretoothtigger wrote: »

Why would a company pay a dividend and be worth less,

Cash is an asset. Remove the asset from the Company and it's net worth is reduced.

sabretoothtigger

Yep regularly happens on company dividend which I think WB disagrees with hence his main berkshire shares cost 200,000 dollars each (and have never paid anything)

For some, there will be income tax on the dividends, but major institutions such as pension funds, government bodies etc, do not pay income tax anyway.

Pensions pay income tax on share income. Gordon Brown changed this, its a massive money maker for government hence they will not revert it back, cannot as gov is too poor now

I agree with you, I like dividends. Purely for efficiency at least on a large scale its actually better for each holder to sell shares if they want to realise profits.
Companies can also take a number of actions to return cash besides dividends


https://en.wikipedia.org/wiki/Chancellorship_of_Gordon_Brown#Taxation_and_spending
http://www.ft.com/cms/s/0/bdd0b754-cc07-11e5-be0b-b7ece4e953a0.html#axzz4ECxsvqsN



SL shares doing well recently, making a comeback on these recent news events - as expected tbh