In hindsight, noting the benefits in terms of cost, hassle and fraud risk, it is surprising it has taken so long to retire the widespread usage of cheques. In 2005, Shell was the first retailer to stop accepting cheques in the UK. Within a few years all other major retailers followed and now this antiquated practice has disappeared from the high street. Yet many FTSE corporates continue to use cheques to pay out dividends to their shareholders. In fact, until 2020, even Shell paid a large portion of its dividend via cheques.
Not any more. Having consulted the market, we overhauled our ways of working, resulting in the following real benefits:
In addition, streamlining Shell’s dividend distributions, even after its dividend reset, saves Shell upwards of millions in cash each year. This cash saving originates from preserved yield, reduced FX leakage, avoiding idle cash at our registrar and reduced administrative cost and banking fees.
This article explains the steps that Shell took and how these benefits were delivered. Given the upsides, we hope the article supports fellow FTSE constituents to follow suit.
The benefits could not have been achieved if Shell’s treasury and its company-secretariat had not teamed up to drive this transformation in dividend payment execution. This enabled a full overhaul of the registrar’s arrangements applying best treasury practices.
Distributing dividends represents a high-exposure business process, where even small improvements can make a material difference. Dividend distribution touches upon a wide range of treasury capabilities: for example, cash management (including multi-currency cash management), counterparty risk, FX and dividend reinvestment. Therefore, it makes full sense for any treasurer to weigh in on the arrangements struck between a corporate and its registrar. This also ensures any trade-off across the associated terms and conditions, and is made upon a sound economic basis acknowledging knock-on effects on investors.
In 2021 there is simply no justification to distribute dividends via cheques. For a corporate, cheques are expensive, cumbersome and fraud-prone. There is a similar downside for shareholders. The cheque is cut on a certain date, but until shareholders have received it by post and cashed it at their bank, they have not received their dividend, exposing them to hassle, charges, lost interest and risk. We were simply not comfortable with such a practice and eradicated cheques fully.
Doing so represented a well-timed change. While Shell’s dividend cheques always represented a considerable administrative headache, settling a multibillion Shell dividend amid a COVID-19 lockdown via thousands of paper cheques would have created havoc.
The UK Central Security Depository CREST, owned and operated by Euroclear UK & Ireland, provides a central bank-based cash distribution capability across pound sterling, euro and dollar. This capability is by far the most robust and efficient way to distribute cash across investors. It is for this reason that custodians, holding practically all of FTSE’s equity for investors, urge corporates to pay their dividends via CREST.
Fortunately, two-thirds of FTSE 100 companies’ dividends are already paid via CREST. However, this still leaves several FTSE constituents, including various dividend aristocrats, not yet doing so. Hearing the market feedback and noting the benefits, Shell is no longer among them as we encouraged our registrar to adopt CREST. All three UK registrars are now perfectly able to distribute via CREST.
While over 95% of FTSE dividends can be received via CREST, the residual balance can only be received via bank transfers. This includes the certificate holders and the corporate sponsored nominee’s participants. For Shell this represents well over 400,000 individual payments each quarter.
Here, we opted to employ real-time payment systems across all three currencies, including Faster Payments combined with CHAPS for pound sterling and SEPA Instant for euro. This enables same-day settlement, avoids batch processing (for example, BACS) and provides instant feedback on each individual payment made.
Before, Shell prefunded its registrar. Every quarter, we wired most of our dividend a few days in advance. There was no benefit: once the cash left our account, we missed out on interest and increased the level of credit risk upon our registrar and its own bank.
The full electronic settlement via CREST and real-time payment systems facilitate same-day settlement. This means that we only depart from the cash early on the payment day, while shareholders can still be confident to receive their dividend on the same value-day.
Going fully electronic also allowed us to expand the options available to shareholders. This made it possible for them to receive a dividend in dollars, when only pound and euro payments were available before. We are an energy company predominantly receiving dollar revenues and therefore declare our dividend in dollars.
This dollar option benefits our shareholders, within which we have a prominent US investor base, as it allows them to receive their dividend directly in dollars and avoid the associated FX exposure and leakage. Equally, it offers benefits to Shell given our natural long position in the dollar, reducing the quantum of pound sterling and euro that needs to be sourced.
Depending upon the currency denomination of your revenues and the residency of your beneficiary investors, you may be able to create a similar win-win by adding the option to receive dividends in dollars or euros.
To facilitate these currency options, we introduced the application of dividend election rights. Doing so represented the inauguration of this technology in the UK market. Shell was already familiar with dividend election rights, as we have been using them for 15 years in the Dutch market.
Election rights remove inefficiencies of the mandate-based election process, align to European market standards and allow investors to apply buyer protection to open positions. Therefore, it is no surprise that the UK market has applauded us for taking this step.
Despite best efforts, there will always be a sizable group of shareholders that cannot be paid their dividend, because they have not provided bank account details. This is particularly relevant for certificate holders and private individuals holding their shares in CREST. Previously, we provided our registrar with funds to cover even for those shareholders who clearly could not be paid. Effectively, this left associated cash idle at our registrar for at least 12 years, at which time the shareholders’ entitlement can be forfeited.
Now we only provide cash for those dividends that our registrar can pay out directly. Furthermore, any dividend that unexpectedly cannot be paid out contributes to funding the next quarterly dividend. This avoids leaving cash idle at our registrar and removes the associated credit risk and yield losses. Furthermore, it has enforced our administrative control over the unclaimed balance.
A streamlined, brand-new payment infrastructure was built to handle our dividend distribution all the way into CREST. We deliberately opted to hold all associated bank accounts and even the CREST receiving agents directly in our own name.
While our registrar continues to operate this infrastructure, ownership offers us greater control and increased transparency and oversight. It also avoids any (intra-day) exposures upon the registrar. Furthermore, it reduces our dependency upon our registrar by reducing its role to merely an operator of our own infrastructure. Finally, taking title on these bank accounts made it possible for us to employ our own principal cash management bank for dividend distribution.
We opted to extend the involvement of our own principal cash management bank Citi. Firstly, this brings superior payment technology across all three currencies and a proven global product capability and execution track record. Secondly, it allows contracting these services under our own framework agreements capturing economies of scope and scale (for example, reduced banking charges) for our own benefit.
Extending Citi’s involvement up to our shareholders’ doorstep made all associated transfers intra-bank. This allowed for overnight processing and thus facilitates earlier settlement on payment day while avoiding any credit concerns for the bank.
Cross-collaboration across Shell, our registrar Equiniti and our principal cash management bank also further strengthened Equiniti’s capabilities.
Royal Dutch Shell dividend – in numbers
On average, each Royal Dutch Shell share is sold (and therefore bought) once a year. This means our shareholder base is subject to constant change. For this reason, for each dividend a ‘record date’ is defined at which point a picture is taken to establish how many shares each holder should receive a dividend for.
Once this picture is taken, each of these holders can elect to receive their dividend in euros, pound sterling or dollars and ensure they can be paid (by setting themselves up to be paid via CREST or by providing their bank account details). Alternatively, one can opt to reinvest their dividend via one of the DRIP Offerings that Shell allows to tag along as an additional election possibility for investors. These choices determine how much euro and pound sterling Shell treasury needs to source. Finally, on the payment day, each holder receives its dividend in the currency requested fully electronically.
Paul Vos, senior manager treasury and corporate finance and Anthony Clarke, deputy company secretary at Shell, are available to provide further details