RBS, U.K. to Scrap Dividend Share as Return to Payouts Seen

Apr 10, 2014 1:14 pm ET

(Closes shares and adds analyst note in final paragraph.)

April 10 (Bloomberg) -- Royal Bank of Scotland Group Plc and the U.K. government agreed to scrap the state’s rights to preferential dividends, bringing the lender closer to making payouts to shareholders and a return to private ownership.

RBS said in a statement yesterday that it will pay the U.K. Treasury a 320 million-pound ($537 million) dividend in 2014, and eventually at least 1.18 billion pounds more to retire the dividend rights completely, “with flexibility as to timing.”

“The retirement of the dividend access share will in the future allow the board of RBS to state more clearly a dividend policy to existing and potential investors,” the Edinburgh- based company said. It will “increase the appeal of RBS’s ordinary shares to a wider range of equity investors, and may expedite” share sales by the government, RBS said.

Sooner-than-expected privatization would be “hugely positive,” Jefferies International Ltd., an investment bank, said in a note to clients today. The U.K., which owns 80 percent of RBS, spent 45.5 billion pounds bailing out the company five years ago.

The European Union approved the change, saying it didn’t constitute state aid. The agreement is subject to approval by non-government shareholders.

Shares Rise

Shares of RBS slipped 0.4 percent to 308.7 pence in London trading, erasing early gains of as much as 2.7 percent. The stock is down 8.7 percent this year.

Jefferies said the agreement also means RBS doesn’t need to prioritize buying back the state’s Class B shares, which the U.K. can now convert to common stock. RBS can use the extra capital to repurchase common stock without needing to buy back the Class B shares at 650 pence apiece, more than twice their current value, Jefferies said.

“The previous terms of the dividend access share, and RBS’s lower-than-expected profitability, would probably have discouraged dividend payments,” the EU said in a statement yesterday. The EU, which regulates state support to bailed-out banks, said the plan to scrap the dividend access share would “confer no advantage” or extra assistance to RBS.

The U.K. government has been pushing the lender to focus on consumer and corporate banking in its home market. RBS has said it would be open to takeover offers for its U.S. unit while it prepares the division for an initial public offering this year.

“A settlement would not have been forthcoming if if HM Treasury didn’t feel confident about the end state of the bank’s portfolios or its management team,” Sanford C. Bernstein analysts Chiranta Barua and Daniel Lasry said in an e-mailed note. They said RBS may begin a “token” dividend by the end of 2015.