Updating the quarterly payout

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The value treasury can bring to the sometimes antiquated post-trade sector is vividly illustrated by the dividend modernisation project pioneered by Royal Dutch Shell.

by Julian Lewis

Published: 3 August 2021

More usually in the realm of company secretaries, dividends are not always a focus for treasury. Yet they involve significant exposures (both credit and potentially also currency), tie up large amounts of cash and depend on payment infrastructure for efficient distribution of each quarter’s payout – including to retail shareholders, whose bank account details the company may not hold and who may even have died since the last payment without it being aware.

In the UK these issues are amplified by the role share registrars play in intermediating between listed companies, custodians and shareholders.

“antiquated and complex”

Enter the Anglo-Dutch oil giant. Although Shell’s payout has fallen from a peak of some $4bn per quarter as the price of its key commodity has fallen, it still distributes as much as $1.3bn to shareholders every three months. Moreover, its large retail investor base means that it must make up to 600,000 individual payments every time.

Paul Vos, Senior Manager Treasury, Shell

These big numbers were accompanied by big shortcomings. “When the team started unpacking the dividend process, we were all shocked at the antiquated and complex landscape,” says Russell O’Brien, group treasurer at Shell.

For one thing, Shell had to pay out over $500m across 150,000 cheques each quarter. Both institutional and retail holders of its A shares, which usually pay dividends in euros, had to accept paper payment since Shell’s registrar (Equiniti) only had electronic payment capability in sterling (via the BACS and CHAPS systems).

In addition, Shell was unable to pay shareholders in US dollars. Why ever not, given that its revenues are in the currency (the oil business’s default unit) and it declares each dividend in it?

The reason was not obvious. It was because the custodian banks who hold as much as 98% of the blue-chip’s equity for investors would not accept cheque payments in a second currency. too. Euros were bad enough, given that they much prefer secure electronic payment via the central securities depositary (CREST, in the UK’s case) – the standard practice in most major markets and some emerging markets too.

Added to these issues, pre-funding of the giant payments cost the company significant interest income and involved prolonged credit exposure. With no balance sheet of its own, Equiniti could hardly front the payment – and both the euro/sterling cheques and sterling BACS payments require at least two business days for settlement.

Finally, significant volumes of Shell’s cash (an undisclosed figure in tens of millions) were trapped at the registrar. This reflected the common tendency for cheque recipients to not get round to cashing them in, as well as the likelihood of some shareholders having died since the last dividend. With cash potentially locked with the registrar for 12 years or more under forfeiture rules, this was a significant burden.

Reaping the benefits

Shell’s efforts to address this raft of issues came at just the right time. After grasping both the risk and inefficiencies, it set out to build a digital dividend payment infrastructure through its cash management bank (Citi). Over two years this system, which Shell owns and Equiniti operates, eliminated cheques fully. Instead, it employed direct CREST payments, plus the instant systems Faster Payments, CHAPS, SEPA and US Fed wires for shareholders to whom CREST payments are not available.

The new system made its first payment in March 2020. This spared Shell the enormous challenge of trying to settle a multi-billion dividend during the first Covid-19 lockdown via thousands of cheques. Instead, it delivered a fully electronic solution.

Besides its pandemic near-miss, Shell has harvested a host of benefits from modernising its approach to dividends. These include savings in the millions (the exact figure is undisclosed) from lower bank fees, less FX ‘leakage’, only funding payable dividends and preserving interest income.

Jessica Uhl, CFO, Shell

Moreover, it has eliminated the credit risk from pre-funding at the same time as giving shareholders a better experience by offering election rights to receive dividends in euros, sterling or US dollars – an unprecedented innovation for the UK that also provides the company clarity over how much of each currency treasury needs to source for each quarterly payout.

“Moving our dividend payment into the digital age has brought real benefits to our shareholders while making our own ways of working safer and more efficient,” comments Jessica Uhl, Shell’s chief financial officer.

O’Brien attributes the company’s journey from its risky and restricted past practice to a new standing as the benchmark for dividend distribution to “tenacity and close collaboration with our financial partners”.

Having struggled with the inefficiencies of its past payment set-up, custodians too welcome Shell’s innovation. “Shell has been a much-needed catalyst in the UK post-trade space amongst the issuers and has helped shine a light on some of the market inefficiencies,” judges Gabriel Sampaio, chair of the UK Custody Working Group.

Now, with a flawless dividend process forming an important part of offering shareholders a world-class investment case, a host of other FTSE 100 companies are contacting Shell to learn from its experience, reports Paul Vos, senior manager treasury and corporate finance. So too are registrars, custodians and other market participants.

Shell will be presenting at the 30th anniversary International Treasury Management Virtual Week from Sept 27 – Oct 1. Registration is free for corporate treasurers. Click here to find out more and reserve your place.

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