Can anyone explain the Tesco share deal to a numpty?

wmb194

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

It's to keep the share price chart looking sensible. If you don't adjust the number of shares following a large return of capital in a couple of years' time next to no-one, and certainly not journalists, will remember why the shares tanked in February 2021 and when they talk about the shares' multi-year performance, how terrible its been, 'only back to where they were' and so on. It just makes the narrative more complicated. This isn't uncommon e.g., Vodafone has a long history of making these types of adjustments following a big return of capital. I think Prudential made a mistake not doing this when it spun out M&G last year or whenever it was (see, I've forgotten already!) and its recent share price chart looks awful, but it's definitely worse than it could have been.

As to why return capital, I don't know but perhaps some of the large shareholders want the cash in their pockets rather than burning a hole in Tesco's? Companies with lots of cash and no obvious way to profitably invest it have a long history of wasting it on e.g., dumb acquisitions.

HappyHarry

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

The benefit to the shareholders is that they now have cash instead of shares, and can invest that cash elsewhere, and hopefully produce better results with it than Tesco can by holding it in their bank.

Most shareholders will want this, as most shareholders are pension funds , unit trusts, OEICs and the like, and are not individual small shareholders. These large shareholders will not, of course, have to pay dividend tax as the shares are held within the above structures, and the dividends can be re invested with no immediate tax liability.

EthicsGradient

wmb194 said:

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

It's to keep the share price chart looking sensible. If you don't adjust the number of shares following a large return of capital in a couple of years' time next to no-one, and certainly not journalists, will remember why the shares tanked in February 2021 and when they talk about the shares' multi-year performance, how terrible its been, 'only back to where they were' and so on. It just makes the narrative more complicated. This isn't uncommon e.g., Vodafone has a long history of making these types of adjustments following a big return of capital. I think Prudential made a mistake not doing this when it spun out M&G last year or whenever it was (see, I've forgotten already!) and its recent share price chart looks awful, but it's definitely worse than it could have been.

But charts are always drawn to take account of splitting of shares or consolidation. Prudential would be a good example - look at a Prudential chart and you can't see the moment when M&G was spun off (it was October 2019). There will be the same drop in the Tesco chart caused by the special dividend (unless someone draws a 'total return' chart, which ought to look smooth) with the share reorganisation as without. The only time a mistake could be made is if someone just looks in an old news article for "what was the Prudential share price in August 2019?" and doesn't realise that is effectively the price for 1 Prudential and 1 M&G share.
The recent (last couple of weeks) Prudential performance has nothing at all to do with keeping the same number of shares issued for the main Prudential company.

Eye2021

HappyHarry said:

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

Whether or not they reduce the amount of shares is irrelevant to the shareholders, at least in the financial sense.

If we take this very simplified example; A company with 1 million shares worth 100p each pays a 20p special dividend. Let's consider the shareholder with 10 shares, worth a total of 1,000p:

Option 1- keep same number of shares:
The shareholder receives 200p dividend.
The value of their share fall to 80p each, so now worth 10x80p = 800p
If the company distributes £10,000 of profit in dividends (10p per share) next year, our shareholder will receive 10x10p = 100p.

Option 2 - reduce number of shares:
The shareholder receives 200p dividend.
The value of their share fall to 80p each, so now worth 10x80p = 800p, BUT there is a consolidation to keep the share price as it was, so instead of holding 10 shares then they will now own 8 shares worth 100p each, so now worth 8x100p = 800p
If the company distributes £10,000 of profit in dividends (12.5p per share) next year, our shareholder will receive 8x12.5p = 100p.

There may be very good reasons to keep the share price as it is, and it is unlikely they are going through this process to provide the board or the lawyers with larger bonuses.

Yes, interesting but not quite right here I don't think.
I think what's happening with Tesco is they have sold part of their business, so this will have the effect of reducing size of the overall business - and profits and gross dividends. 
By repaying this amount to shareholders, and with an equivalent pro rata reduction in shares, the shareholder should be in a no better position now except that part of their shareholding is liquidated - so future dividend income will be less (assuming the price per share and yield per share stays about the same, which I think is what they're saying). It's like a share buy back scheme.
So I can't see how shareholders benefit.
Technically shareholders shouldn't lose now but in a low interest rate world they do lose future income (unless they use the dividend to by shares back again or other high yielding investments). Also I went through a similar process a year or two back with some of my other shares and my net position afterwards was a loss.
There's probably accounting or tax benefits for Tesco and benefits for their executive team, but none for shareholders. Tesco could also consider reinvesting the money into their existing business to improve efficiency / profitability.

moneysavinghero

Eye2021 said:

Tesco can gain - if there are less shares they can distribute less money to shareholders going forwards, and perhaps pay their Directors and Board more.
If noone is gaining where is all this money that Tesco have received actually going then ?
I have Tesco shares and I'm confused too.

If you are a Tesco shareholder then YOU are Tesco (collectively with all the other shareholders).

Less shareholders does not mean less money to distribute. The same amount will get distributed, just the each share will get more. Ie there is £100 to go to 100 shares that would be £1 per share, if only 50 shares existed that would be £2 per share.

HappyHarry

Eye2021 said:

HappyHarry said:

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

Whether or not they reduce the amount of shares is irrelevant to the shareholders, at least in the financial sense.

If we take this very simplified example; A company with 1 million shares worth 100p each pays a 20p special dividend. Let's consider the shareholder with 10 shares, worth a total of 1,000p:

Option 1- keep same number of shares:
The shareholder receives 200p dividend.
The value of their share fall to 80p each, so now worth 10x80p = 800p
If the company distributes £10,000 of profit in dividends (10p per share) next year, our shareholder will receive 10x10p = 100p.

Option 2 - reduce number of shares:
The shareholder receives 200p dividend.
The value of their share fall to 80p each, so now worth 10x80p = 800p, BUT there is a consolidation to keep the share price as it was, so instead of holding 10 shares then they will now own 8 shares worth 100p each, so now worth 8x100p = 800p
If the company distributes £10,000 of profit in dividends (12.5p per share) next year, our shareholder will receive 8x12.5p = 100p.

There may be very good reasons to keep the share price as it is, and it is unlikely they are going through this process to provide the board or the lawyers with larger bonuses.

Yes, interesting but not quite right here I don't think.
I think what's happening with Tesco is they have sold part of their business, so this will have the effect of reducing size of the overall business - and profits and gross dividends. 
By repaying this amount to shareholders, and with an equivalent pro rata reduction in shares, the shareholder should be in a no better position now except that part of their shareholding is liquidated - so future dividend income will be less (assuming the price per share and yield per share stays about the same, which I think is what they're saying). It's like a share buy back scheme.
So I can't see how shareholders benefit.
Technically shareholders shouldn't lose now but in a low interest rate world they do lose future income (unless they use the dividend to by shares back again or other high yielding investments). Also I went through a similar process a year or two back with some of my other shares and my net position afterwards was a loss.
There's probably accounting or tax benefits for Tesco and benefits for their executive team, but none for shareholders. Tesco could also consider reinvesting the money into their existing business to improve efficiency / profitability.

Tesco will have weighed up the pros and cons of selling part of their business, and then whether or not to return that cash to the shareholders or keep them to reinvest.

Selling the overseas business's was a management decision, and will be based on the price acquired, predicted future revenue from that business and political risk amongst other things. That was decided internally.

The shareholders then get to vote on whether or not to distribute the cash from the sale of the business in the form of an extra dividend, or whether to retain the cash in the business. As the management are recommending distributing the cash in the dividend, it implies they do not have a clear objective of how to spend £4bn to "improve efficiency / profitability." I would expect the majority of shareholders to vote in favour of the distribution.

If the shareholders do vote for the extra dividend, the shareholders will then vote on whether or not to consolidate the shares, by reducing every shareholders holding. Again, as this is recommended by the management team, I would expect most shareholders to vote in favour.

These votes are taking place prior to and at the AGM on 11th February 2021. As a shareholder, you can vote for or against each of the above.

You are right, by distributing the dividends, Tesco will be a smaller company. By keeping the funds, Tesco will remain a large company, but see it's profitability fall as the £4bn is not being efficiently utilised.

Edit: Voting closes a couple of days before the AGM:
In accordance with the Circular, all votes and proxy appointments must be received by Equiniti by 10.30am on Tuesday, 9 February 2021.

wmb194

EthicsGradient said:

wmb194 said:

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

It's to keep the share price chart looking sensible. If you don't adjust the number of shares following a large return of capital in a couple of years' time next to no-one, and certainly not journalists, will remember why the shares tanked in February 2021 and when they talk about the shares' multi-year performance, how terrible its been, 'only back to where they were' and so on. It just makes the narrative more complicated. This isn't uncommon e.g., Vodafone has a long history of making these types of adjustments following a big return of capital. I think Prudential made a mistake not doing this when it spun out M&G last year or whenever it was (see, I've forgotten already!) and its recent share price chart looks awful, but it's definitely worse than it could have been.

But charts are always drawn to take account of splitting of shares or consolidation. Prudential would be a good example - look at a Prudential chart and you can't see the moment when M&G was spun off (it was October 2019). There will be the same drop in the Tesco chart caused by the special dividend (unless someone draws a 'total return' chart, which ought to look smooth) with the share reorganisation as without. The only time a mistake could be made is if someone just looks in an old news article for "what was the Prudential share price in August 2019?" and doesn't realise that is effectively the price for 1 Prudential and 1 M&G share.
The recent (last couple of weeks) Prudential performance has nothing at all to do with keeping the same number of shares issued for the main Prudential company.

You've linked to the wrong Prudential (Inc, American). You can see it on Prudential plc's London chart - 21/10/19 vs 18/10/19 - and it's more pronounced on its New York ADR chart - 31/10 vs. 01/11/19 - but of course events can overtake these sorts of things (duh) and you're right that the effect has been swamped. 

No, however you draw it, there shouldn't be the same drop in Tesco's chart following the dividend: this is the whole point.
"The effect of the Share Consolidation will be to reduce the number of Existing Ordinary Shares in issue by approximately the same proportion of market capitalisation returned via the special dividend (for these purposes, the market capitalisation used is that as at market close on 22 January 2021). It is anticipated, therefore, that the market price of each Ordinary Share in the Company should remain at a broadly similar level following the Special Dividend and the Share Consolidation."
https://www.investegate.co.uk/article.aspx?id=202101250712267298M

EthicsGradient

wmb194 said:

EthicsGradient said:

wmb194 said:

Eye2021 said:

For this to be of benefit to the shareholders they should pay the special dividend but not reduce the amount of shares. So to go back to my original post - what is the point ?
They are giving with one hand and taking back with the other, so it appears to benefit noone (except the stockbrokers and lawyers that manage the process).

It's to keep the share price chart looking sensible. If you don't adjust the number of shares following a large return of capital in a couple of years' time next to no-one, and certainly not journalists, will remember why the shares tanked in February 2021 and when they talk about the shares' multi-year performance, how terrible its been, 'only back to where they were' and so on. It just makes the narrative more complicated. This isn't uncommon e.g., Vodafone has a long history of making these types of adjustments following a big return of capital. I think Prudential made a mistake not doing this when it spun out M&G last year or whenever it was (see, I've forgotten already!) and its recent share price chart looks awful, but it's definitely worse than it could have been.

But charts are always drawn to take account of splitting of shares or consolidation. Prudential would be a good example - look at a Prudential chart and you can't see the moment when M&G was spun off (it was October 2019). There will be the same drop in the Tesco chart caused by the special dividend (unless someone draws a 'total return' chart, which ought to look smooth) with the share reorganisation as without. The only time a mistake could be made is if someone just looks in an old news article for "what was the Prudential share price in August 2019?" and doesn't realise that is effectively the price for 1 Prudential and 1 M&G share.
The recent (last couple of weeks) Prudential performance has nothing at all to do with keeping the same number of shares issued for the main Prudential company.

You've linked to the wrong Prudential (Inc, American). You can see it on Prudential plc's London chart - 21/10/19 vs 18/10/19 - and it's more pronounced on its New York ADR chart - 31/10 vs. 01/11/19 - but of course events can overtake these sorts of things (duh) and you're right that the effect has been swamped. 

No, however you draw it, there shouldn't be the same drop in Tesco's chart following the dividend: this is the whole point.
"The effect of the Share Consolidation will be to reduce the number of Existing Ordinary Shares in issue by approximately the same proportion of market capitalisation returned via the special dividend (for these purposes, the market capitalisation used is that as at market close on 22 January 2021). It is anticipated, therefore, that the market price of each Ordinary Share in the Company should remain at a broadly similar level following the Special Dividend and the Share Consolidation."
https://www.investegate.co.uk/article.aspx?id=202101250712267298M

I'm in the UK, so that Google search shows me Prudential plc (LON:PRU). Your results may vary. You are right that, for the Prudential split into 2 shares, the chart drawn (eg by the LSE itself) does show the actual (combined) Prudential price up to 18/10/2019, and the new Prudential-only price after that (which I can check because I have reports from Sept 30th and Dec 31st to compare). It's hard to see, because that daily drop was only 140p per share, when the M&G shares were worth 218p, and that kind of difference had been seen within a couple of days around that time too.

However, that was for a split into 2 companies; looking at a special dividend (with, coincidentally, a 15 for 19 consolidation) for 3i Infrastructure plc in March 2018, we see that the LSE shows its chart with the price very steady around 250p until 14 March; then the 41.4p (per old share) special dividend is paid, and the price show on the graph drops from 254p to 203p. The dividend per new share was 41.4 * 19 / 15 = 52.44p. Their next annual report notes the actual share price before the dividend was announced was 197.8p, so we can see that the graph has been drawn to allow for the share consolidation, and gives pre-consolidation prices as higher.

So we will expect a step change in the Tesco graph too, since this is an almost identical situation, and the 15 for 19 consolidation won't hide it.

D_P_Dance

I too am a numpty.  I have received a dividend of 

underground99

D_P_Dance said:

I too am a numpty.  I have received a dividend of 

No need to feel guilty about it. The dividend was paid to all investors, even self-confessed numpties...