Aviva return of capital and share consolidation

[bmwmike]

Hello

I received a letter from HSBC investments saying i'll be getting £1 for every Aviva share I hold, subject to AGM approval. Looking at the Aviva website, its not quite that straightforward:

aviva said:

As an illustrative example, following the capital return and Share Consolidation, a Shareholder with a holding of 100 ordinary shares at the Record Time would receive cash of £100 via the B share scheme, and would have a remaining holding in Aviva of 75 shares

https://www.aviva.com/newsroom/news-releases/2022/03/proposed-return-of-capital-to-shareholders/

So i'm confused about how that is a capital return if they also swipe 25% of your shares - if the share price is over £4 its not worth doing - if i read correctly?

Thanks

[Jon39]

No need to worry, it is an age old system. You don't loose out, in fact it helps you.

If they returned the money to you by the dividend method, you would pay tax.
New 'B' shares are issued, then sold in your behalf. You get the full proceeds, less a miniscule commission, without tax being deducted.

The change in the number of shares is done so that previous share prices are kept in line from here on.
Without that consolidation change, the theoretical share price would be lower because money has left the business.

Many companies have used this arrangement for years.

Edited by Jon39 on Monday 14th March 13:28

[NowWatchThisDrive]

It's just a more tax efficient way of returning £3.75bn (almost a quarter of mkt cap) to shareholders than paying them a massive special div on which they'd be taxed at potentially 38%. So instead you get issued B shares that you redeem for £1 each - as a capital gain it's taxed more favourably and you have choice as to when you crystallise it. The accompanying consolidation is just to maintain consistency in the share price before and after.

Edit: beaten to the punch as I typed

Edited by NowWatchThisDrive on Monday 14th March 13:30

[craig1912]

As an ex employee I have 2500 shares, does that mean £2500 in cash?

[bmwmike]

Jon39 said:

No need to worry, it is an age old system. You don't loose out, in fact it helps you.

If they returned the money to you by the dividend method, you would pay tax.
New 'B' shares are issued, then sold in your behalf. You get the full proceeds, less a miniscule commission, without tax being deducted.

The change in the number of shares is done so that previous share prices are kept in line from here on.
Without that consolidation change, the theoretical share price would be lower because money has left the business.

Many companies have used this arrangement for years.

Edited by Jon39 on Monday 14th March 13:28

NowWatchThisDrive said:

It's just a more tax efficient way of returning £3.75bn (almost a quarter of mkt cap) to shareholders than paying them a massive special div on which they'd be taxed at potentially 38%. So instead you get issued B shares that you redeem for £1 each - as a capital gain it's taxed more favourably and you have choice as to when you crystallise it. The accompanying consolidation is just to maintain consistency in the share price before and after.

Edit: beaten to the punch as I typed

Edited by NowWatchThisDrive on Monday 14th March 13:30

Thanks both but i must be a bit thick as i'm not getting it. If i have 2000 shares worth approx £8k, i get £2k back but end up with 1500 shares worth approx £6k so i've not gained anything. There is a dividend payment happening around the same time already but i ignored that as it muddies the waters a bit.

[Mr Pointy]

You're assuming the share price stays the same before & after the event. In theory the share price should rise because there are fewer shares available. Amazon are doing the reverse with a stock split - the shares are so expensive they are breaking them down into more shares with a smaller individual value.

[NowWatchThisDrive]

bmwmike said:

Thanks both but i must be a bit thick as i'm not getting it. If i have 2000 shares worth approx £8k, i get £2k back but end up with 1500 shares worth approx £6k so i've not gained anything. There is a dividend payment happening around the same time already but i ignored that as it muddies the waters a bit.

Correct - like a dividend, it's not free money but cash leaving the company to be returned to you. The consolidation then means the share price stays ~£4, otherwise in theory it should drop to ~£3 all else being equal.

[bmwmike]

NowWatchThisDrive said:

Correct - like a dividend, it's not free money but cash leaving the company to be returned to you. The consolidation then means the share price stays ~£4, otherwise it should drop to ~£3 all else being equal.

Ahah! thanks, makes sense - limiting "supply" sort of thing.

[Jon39]

bmwmike said:

Thanks both but I must be a bit thick as i'm not getting it. If i have 2000 shares worth approx £8k, i get £2k back but end up with 1500 shares worth approx £6k so i've not gained anything. There is a dividend payment happening around the same time already but i ignored that as it muddies the waters a bit.

No, you are not thick at all. It is not a magic trick to somehow make shareholders extra money. You have not gained, but had they returned the money to shareholders by dividend, you would have lost money. Doing it that way, the Treasury would have gained though.

I have not followed this particular company, so don't know the reason for the return of cash. Often 'B' shares transactions are used following the disposal of a significant subsidiary. I would assume that the board of directors must have decided, that they have no plans to invest the money in new acquisitions etc., so rather than just sit on shareholders cash earning very little, they return it so that each shareholder can decide how they want to allocate the capital.

Hope that helps.

[paulgill28]

I am not sure how issue of B shares benefits shareholders. On to day's price for my holding assume the share price remains the same at time of consolidation I actually lose out.



To break even on the consolidation the price needs to be: £4.2371 for 4,800 shares




I therefore question what benefit there is to a share holder apart from a consolidation lost. The shareholder is forced to reduce the value of their ordinary share holding and take cash whilst sustaining a small loss at todays price.

Am I missing something here? I don't see the point apart from tax savings between capital gain and income tax on dividends. Surely it would be better for Aviva to invest the money meaningfully to increase revenue and profitability of the business or enhance future dividends over a period of time in less profitable years for the business?

Can someone brighter than me explain please?

[paulgill28]

So why not give shareholders an automatic option to leave their return of capital as stock. The way I understand it is I am being forced to liquidate part of my existing shareholding for no gain as in theory the consolidated share price will be the same. I will incur commission and broker fees to reinvest my return of capital in Aviva shares to maintain approximately the value of the investment I had before consolidation plus the loss I highlighted above.

Seems the only winners here are those who have very large holdings who will avoid capital gains through the consolidation.

[LeoSayer]

I assume shareholders voted through the proposal.

[paulgill28]

LeoSayer and NowWatchThis Drive you are both right. Nevertheless everything I said stands.

[LeoSayer]

paulgill28 said:

LeoSayer and NowWatchThis Drive you are both right. Nevertheless everything I said stands.

Not really. You seem to be focussed on your own needs rather than those of the company.

If you're so unhappy with the company's approach then why look to increase your ownership?

[Skyedriver]

Having a small holding of AV., I wonder if it's worth selling before and maybe buying back on any dip?
Why have things got to be so complicated.

[Jon39]

Skyedriver said:

Having a small holding of AV., I wonder if it's worth selling before and maybe buying back on any dip?
Why have things got to be so complicated.

You could try selling then buying back, if you enjoy gambling and paying fees.
Not necessary though, because unless stock markets move much, you will be in about the same financial position after the 'B share transaction, as you were before.

Not really complicated, once the basic concept is understood.

Companies return money to shareholders, when they do not have a reason for excess capital to put to good investment use.
Most shareholders don't expect companies to have huge excess amounts of cash sitting idle in bank accounts.

I cannot remember the reason for Aviva to have excess cash, but the Tesco example might help.
Tesco sold a very valuable far east subsidiary. They had already decided against any more overseas expansion plans.
Therefore the shareholders money (proceeds of the sale) was not going to be used to financially benefit shareholders.
It was returned to shareholders by special dividend. Presumably it could have been returned using the 'B' 'share scheme, to save shareholders being subject to income tax ('B' scheme has capital taxes instead and many shareholders would have not used their annual Capital Gains Tax free allowance).

The number of shares people held were also reduced, purely to maintain a similar share price. That can cause confusion, but we need to think about; money had left the business; business then less valuable; share price would reduce. The adjustment in shareholding numbers simply eliminates that technical share price reduction.

Fewer shares than before held, but look at the value after the transaction; add the special dividend amount, and shareholders were roughly equal to where they were before the transaction in theory. The reason for saying theory, is that stock markets might have moved in any direction during the transaction.

If still not clear, try this article;
https://inews.co.uk/inews-lifestyle/money/tesco-sh...

[Jon39]

paulgill28 said:

So why not give shareholders an automatic option to leave their return of capital as stock. The way I understand it is I am being forced to liquidate part of my existing shareholding for no gain as in theory the consolidated share price will be the same. I will incur commission and broker fees to reinvest my return of capital in Aviva shares to maintain approximately the value of the investment I had before consolidation plus the loss I highlighted above.

Seems the only winners here are those who have very large holdings who will avoid capital gains through the consolidation.

Correction to your last paragraph.
With the consolidation part itself, there is no tax event involving shareholders. It is a corporate action by the company, not the shareholders.

Small shareholders do win, because they are not being made subject to income (dividend) tax. The 'B' share scheme is subject to capital gains tax (because the 'B' shares allocated to you have been sold), but individuals with smaller holdings probably pay nothing at all, because they have a Capital Gains Tax free allowance (think about £10,000 every tax year).

....................

You seem to be confident about the future prospects for the AVIVA business, so what I would do, is wait patiently for a serious stock market fright, then consider buying (a worthwhile quantity) to add to your present holding. At such times, there will be bad news being reported, so you would need to be of firm mind, but if you are confident about AVIVA coping with whatever caused the fright, then the only thing that has changed, is you can buy additional shares at a lower price.

We must keep in mind, it is better to buy a wonderful business at a good price, than a good business at a wonderful price.

Edited by Jon39 on Monday 9th May 01:02