Proactive Investors - Shareholder returns among the oil majors are back in the spotlight.
By Jefferies’ estimations, Shell PLC (LON:SHEL) is projected to buy back up to 50% of the company by 2030- that’s £80 billion at current prices.
The oil major’s decision to keep quarterly buybacks at $3.5 billion means it is projected to return 42% of its cash flow from operations to shareholders, comfortably above its 30-40% policy range when including dividends.
This should be seen “as a commitment to maintaining a stable distribution level”, said analysts at Jefferies, all the while reducing gearing to just 6%.
Shell (LON:RDSa) increased its dividend by 4% sequentially in the fourth quarter to $0.344 per ordinary share (though this remains below the $0.47 per share dividend paid out every quarter between 2014 and 2019, until the pandemic severely reduced shareholder returns in 2020 and early 2021).
In 2023 the management distributed $23 billion (£18.2 billion) to shareholders, representing more than 42% of cash flow from operations.
With Shell’s yearly free cash flow comfortably exceeding $30 billion on a regular basis, that’s a lot of billions not going towards green-transition investments.
BP (LON:BP)’s shareholder returns policy is equally ambitious.
It announced plans to initiate a $1.75 billion share buyback ahead of its first-quarter results while pledging to allocate $3.5 billion for share repurchases in the first half of 2024 alone.
Subject to prevailing market conditions and the company's ability to sustain a strong investment-grade credit rating, BP is setting its sights on executing share buybacks of at least $14 billion (£11 billion) by the end of 2025.
In other words, BP is aiming to redistribute at least 80% of its surplus cash flow back to its shareholders.
Again, quite a few billions not going towards green investments (in BP’s defence, it has been fairly candid about scaling back its green-transition targets).
BP’s buybacks, though, have drawn criticism for other reasons.
“BP's shareholders remain among the biggest winners of Russia's war in Ukraine,” Global Witness's senior campaigner Jonathan Noronha-Gant said of BP’s latest earnings. "And now the firm has decided to hand that windfall to investors instead of clean energy or the victims of the war".
“Shareholders should want to protect their long-term positions. That means demanding a rapid clean energy transition for companies like BP. These reckless shareholder pay-outs do the opposite," said Noronha-Gant.
However, these shareholder returns do come with tax implications that could theoretically be captured by the Treasury.
Untangling buyback and dividend taxes
Dividend and share buyback taxes are a complex affair.
Dividend taxation varies according to the shareholder's income tax band, with basic rate taxpayers paying 8.75% on dividends over £2,000, after considering the personal allowance.
For higher and additional rate taxpayers, these rates escalate to 33.75% and 39.35%, respectively.
Share buybacks also incur taxes, with companies paying a 0.5% stamp duty on transactions above £1,000.
Shareholders participating in buybacks may have the proceeds taxed as capital gains, subject to a lower rate of 10% to 20%, depending on the conditions met under the Corporation Tax Act of 2010.
Left-leaning think tank The Institute for Public Policy Research estimated that a windfall tax on buybacks issued by Shell and BP alone could generate an extra £4.8 billion per year.
An annual 1% buyback levy on all FTSE-listed companies, similar to the one introduced in the US by President Joe Biden would raise another £225 million.
The green shareholder schism
Shareholders typically prefer cash to be spent on the highest-yielding possibilities.
If Shell and BP are unable to convince their shareholders that green investments can generate sufficient yields to keep them happy, giving them cash is the only pragmatic alternative.
Last April, BP shareholders threw their support behind the oil major’s watering down of its carbon-reduction targets, with over 83% of investors backing the policy against an activist campaign from Follow This.
Those voting with Follow This did include, however, government-backed pension scheme Nest, the Universities Pension Scheme, LGPS Central, Brunel Pension Partnership and Border to Coast, a group with around £440 million invested in the oil giant.
Katharina Lindmeier, senior responsible investment manager at pension fund Nest, told the BBC at the time: "Not only were we disappointed to see the company going back on the targets, but we were also really surprised not to have had any consultation."
Such is the schism between Britain’s 2050 net-zero targets and the oil majors’ existing shareholder obligations.
With shareholder returns only projected to increase, the schism is becoming wider than ever.