What are your windfall shares worth?

This week saw a surge in the price of ailing Abbey National shares, as takeover talk surrounded the bank. This news will cheer the 1.8 million patient Abbey National shareholders who have clung on to their shares since the lender became the first building society to shed its mutual status in 1989. At flotation, 5.5 million people became Abbey shareholders when the shares were worth £130 for the average 100 batch. Today, that box of 100 shares is priced at over £500.

Halifax shareholders who held on to the stock that they received when it converted to a bank in 1997 have also had a tough time of it. They have watched the shares, floated at about 730p, rise to 950p, then nearly halve in value before staging a recovery shortly before the lender merged with Bank of Scotland in 2001.

By the end of this week, Halifax shares – now branded HBOS – were back above their float level at about 775p. The bank, which has the largest shareholder base of any UK company, cannot say how many of its original 3.5 million windfall recipients still have their shares but it estimates it to be more than 1.1 million.

So, six years after flotation, is it time to sell Halifax stock and the other windfall shares? For once, there is a broad consensus among stockbrokers and financial advisers. Most of these shares look worth keeping for the moment.

Woolwich, Northern Rock and Alliance & Leicester joined the demutualisation party of the summer of 1997.

Nearly 2.4 million Woolwich customers pocketed about 650 shares, each priced at 296p. After its takeover by Barclays, former members — of whom there are still three quarters of a million — received cash payments for each share plus 0.1175 per cent of a Barclays share. Anyone who held on to the cash and the new stock would now have a windfall worth more than £3,000.

About 200,000 Northern Rock customers have retained their windfall shares. They are sitting on a sizeable gain – the shares are now worth about 726p, compared with their flotation price of 452p.

Alliance & Leicester borrowers and savers have a lot to be smug about. Up to 700,000 people have kept their free shares, many of whom scooped the full entitlement of 500 shares at 533p. They have since risen to about 895p.

Although Bradford & Bingley made a rather belated appearance on the stock market in December 2000, the shares have climbed to about 317p. That is a gain of almost 30 per cent for the 1.2 million people who have retained the stock.

Experts at Barclays Stockbrokers say that it is important to hold on to the former building societies. The analysts add that it is even worth buying more Abbey shares.

Hilary Cook, head of investment strategy at Barclays Stockbrokers, says: “Alliance & Leicester in particular has been a very successful hold. This banking sector is one we like and we would recommend holding on to the shares. We think they should enjoy a good run. Banks should prosper in an environment where interest rates are set to stay low and there is low inflation.”

Benedict Lawson, investment adviser at Seven Investment Management, agrees. He says: “Financial companies have had a very tough time of it over the past few years because of falling stock markets. But I think that, in general, they will now do well and it is worth holding on to them.”

However, Ms Cook cautions that shareholders should work hard to balance the risk in their portfolios. “If you’ve got lots of demutualisation shares, you would do well to rebalance your portfolio.”

If this all sounds like too much work, there are other options. You could dispose of your shares using a cheap internet or telephone broker. Hargreaves Lansdown charges £9.95 per online deal.

Or you could opt for the altruistic option. ShareGift, the charity share donation scheme, says that people are increasingly offloading unwanted stock which is then collected up, encashed, and the proceeds are donated to charity. ShareGift has received more than £40,000 of shares in Abbey National in recent years.

While you cannot offset any losses crystallised against capital gains tax (CGT) liability, investors who held appreciating shares will be exempt from CGT.

As Standard Life customers await the outcome of Mr Stonebanks’ next sally against the mutual insurer, they would do well to reflect on the experiences of Friends Provident - the only other mutual insurer to list on the stock market in recent years. Since the insurer became a listed company in July 2001, its policyholders’ share windfalls have fallen in value by at least £200 and experts say they must wait “a few years” before they can expect a recovery.

Friends Provident’s demutualisation was driven by a desire for expansion, rather than by the demands of policyholders. A spokesman says: “We were an ambitious company that wanted to grow its marketshare and we needed access to capital to compete in the acquisition market.”

In return for supporting the demutualisation, Friends Provident’s 2.5 million eligible policyholders received 200 free shares each, a windfall equivalent to £450 at the opening share price of 225p.

One month after the listing, the value of Friends Providents’ shares rose to almost 255p, boosting policyholders’ windfalls to £510. Since then, however, Friends Provident has been buffeted by the same difficult trading conditions that have rocked the rest of the life insurance sector.

Its shares have fallen steadily and, after hitting a low of 73p this year, have settled at about 137p, putting the value of the windfall at about £270.

In the long term, experts forecast that Friends Provident’s share price will recover but caution policyholders to be patient.

Roman Cizdyn, an insurance analyst at Commerzbank, says: “I’m still hopeful that there will be an improvement in the market so, personally, I’d hang on to them, but you are looking at a couple of years.” Standard Life carpetbaggers, take heed.