Friday, 13 May 2011

Rolls-Royce: What to do with a problem like C shares?

Just having some internal debate around what to do with my allocation of C shares in Rolls-Royce.

For some time now the company has not delivered a traditional cash dividend due to the always complicated tax laws put in place by UK plc. 
Instead the company initially replaced them with B shares (June 2004) and then more recently these have been replaced by C shares (Jan 2009). 
Both of which are a means of ensuring more efficiency in the company's corporation tax dealings as cash dividends could generate something sinister called "shadow" Advanced Corporation Tax.

Didn't have a problem with B shares which were quoted and as such came with 3 options:
- retain B shares
- convert to cash
- convert to ordinary shares under a reinvestment option which had additional advantages of:
    - a rolled-over of any tax liability into the ordinary shares
    - no dealing or stamp duty charges
    - a calculated price for conversion being available prior to payment elections.

However, since the introduction of C shares I have always taken them as cash as the re-investment option:
- incurs a dealing (albeit low at 0.2%) and stamp duty charge (0.5%)
- realises a potential capital gain as the C shares are converted to cash to create the funds to purchase shares (yes that is a potential capital gain and can't be avoided even when taking the cash option).
- the shares are bought en masse on the open market after the election so no price is known and the very act of purchasing a large amount of shares could create an artificial market and drive up the purchase price (or at least that is my reading of the situation).
The company markets this option as still being efficient for shareholders due to the reduced charges to purchase a small basket of shares.

However, I can get this almost every week or month through alternate brokers such as Selftrade or Halifax Sharebuilder where the dealing charge is fixed at £1.50 per trade regardless of size as long as the dealer undertakes the trade on fixed days. 
This gives them an opportunity to aggregate purchases in the same company from similar minded investors, thereby creating some cost efficiency for them.

So, B shares were more efficient for the company and its shareholders but C shares less so for the shareholders!

Well, as a consequence of R-R not being able to hold onto any significant share price gains over the last 12 months, due to significant headwind from the US Senate/JSF issues and A380/Trent 900 problems, I had been asking myself whether or not to elect the re-investment option.
But, I think I may have answered my own question by writing my thoughts down. 

The 3 available options are:
1:- retain the C shares as C shares. They are not quoted as B shares were but by retaining them you would postpone any potential Capital Gain. There would also be a small dividend due of 75% of the London Inter-Bank Offered Rate (LIBOR)
2:- convert to cash. A known quantity and a potential capital gain to be added to other capital gains when considering your 2011-12 CGT allowance of £10,600 (annual exempt amount).
3:- re-invest. Very little control or expectation of price/value once the election has been made.

However, by utilising alternative means I could still re-invest the dividends in R-R shares at a time closer to my choosing (still restricted to certain dealing dates) and divorced from any artificial market that the C share re-investment plan might create. 
In addition, I can maintain my current strategy of taking the dividend and aggregating it with the cash and dividends already in my portfolio and either: re-invest a greater amount should the opportunity arise or, alternatively, I could re-invest in a different opportunity.

So probably the cash option for me.

Links: C shares Your guide to C Shares

1 comment:

  1. Useful blog post, thank you (and still relevant in 2017). Just about to be issued with my first RR divis in the form of C Shares and was still unsure about which route to take with them. Seems so unnecessarily complicated really.