Which Shell Shares Should You Own? (rds.a vs rds.b)
Beyond knowing the difference between each class of Royal Dutch Shell shares we believe it’s important to know the history of them and the fundamental value of one class of shares over the other.
We’ll start off with a brief explanation on the difference, before diving into the numbers and fundamentals of each class of shares and which class is the better buy currently for your personal circumstances.
What's the Difference between RDS.A and RDS.B?
There’s quite a few things that make RDS.A fundamentally different compared to RDS.B — because of this we’ll start with what’s the same. Both shares represent and equal share in Shell as a company, and has equal rights in regards to dividend distributions.
The primarily difference is where they’re located (and thus how the dividends get taxed); RDS.B is based in the UK and does NOT have any tax withholding penalty, while RDS.A has a 15-25% tax withholding on the dividend. Due to this RDS.A generally is cheaper than RDS.B per share.
However there’s another big difference that, at the time of writing this article, makes RDS.B cheaper than RDS.A — Namely that RDS.A shares have first-serve rights when it comes to a bankruptcy or liquidation scenario. This means that RDS.B holders will not get a dime or any real value until all RDS.A shareholders have gotten any assets/value that remained upon bankruptcy. Due to the oil issues that occurred during the pandemic some people fear bankruptcy, and thus the normal RDS.A being cheaper than RDS.B flipped.
But RDS.A doesn’t get that benefit for free — shareholders of RDS.A do not have voting rights within the company, and thus are at the whims of management and RDS.B Shareholders decisions. This doesn’t particularly concern us, however if you believe an activist may come and try to takeover Shell, then buying voting-shares may be a better choice for you. This isn’t something we personally count on though.
- No Voting Rights
- First-right to Assets during Bankruptcy
- Has a 15-25% withholding tax for foreigners (US citizens included)
- Based in Amsterdam (Subject to Netherland/Euro Tax Regulations)
- Has Voting Rights
- Shareholders get screwed even more during bankruptcy
- No Withholding Tax for US Citizens or most foreigners
- Based in London, UK (Subject to UK tax laws/regulatory changes)
Do Voting Rights Matter Anyway?
In a stock like RDS where the owners don’t have complete and absolute control like they do in Under Armor or Google, they certainly can matter. However RDS has a generally well-liked management and it’s very unlikely that an activist investor comes in and tries to take over the company and make changes. Because of this we don’t feel like the Class B voting shares will materially outperform class A shares whatsoever in the long-term.
Shell is a boring company with boring management in a boring industry that has little benefit for an activist investor to disrupt. It’d be nice to have voting rights, but we don’t personally feel shares with voting rights are worth materially more with RDS.
Should You Care About the Bankruptcy Benefits?
On the surface they sound good — but historically they often don’t mean much due to the way bankruptcy proceedings go they likely would not result in much. If you’re lucky you’d come out a bit ahead of RDS.B holders, maybe a few dollars at best, but ultimately you’d be screwed. That’s what happens during bankruptcy. You get screwed. There’s no way around that.
This is because first the debtors would get paid and have first rights, special preferred shares would then come in, then potentially a different non-traded share, then finally RDS.A owners, then eventually RDS.B owners. Ultimately this usually means only debtors get a good settlement, preferred shares get scraps, and actual shareholders get screwed. Because of this we don’t value this benefit really at anything at all — especially because we don’t invest to hold to bankruptcy nor do we think it’s likely with a relatively low-cost producer like Royal Dutch Shell.
So Which Shell Share Should You Own?
When things were all pretty in the oil industry this was simple — RDS.A was cheaper and the withholding fees were made up by the discount. However now that RDS.A isn’t cheaper, it’s a harder question to answer.
Personally we own RDS.A shares, but this is just because we bought them before when they were cheaper than RDS.B shares. If we were to buy more Shell Stock we’d opt for whichever is cheaper, as truthfully we don’t think the bankruptcy benefit nor voting rights are very meaningful or one is significantly better than the other. So how would you tell which is cheaper?
Well our determination would be to simply buy whichever has the lower stock price — maybe with a 1-2% premium in RDS.B share price over RDS.A — as ultimately the dividend withholding doesn’t mean much if you’re a US citizen like we are, as due to tax treaties when you get your 1099-B from your brokerage it should have the withheld dividend amount for you to claim on your taxes. Ultimately this makes the foreign withholding not really have a material impact on your investing performance over the long-term.
The only way you’ll be materially impacted by the tax withholding RDS.A automatically does is that you’ll have a 10% higher effective long-term qualified dividend tax rate if you have such a large amount of money in the stock that you hit their upper threshold withholding of 25%, as the 10% over US long-term qualified dividend tax rate generally will not be reimbursed. We aren’t tax-advisors however, so we may be misinterpreting this or there may be a way around it — so if you’re a big boy who this matters to we’d recommend asking your tax advisor. This is meant to just be a helpful starting line for those who can’t afford or otherwise do not have a tax advisor.