Scrip Dividend Scheme
Other than the conventional avenue of rewarding shareholders through cash dividends, there are also other methods available. One of these other methods would be through scrip dividends by means of a Scrip Dividend Scheme “SDS” exercise.
What are scrip dividends?
Scrip dividends are essentially dividends in the form of shares instead of cash. It is normally executed through an exercise commonly known as a Dividend Reinvestment Scheme. This exercise is a form of secondary issue and basically provides the existing shareholders with an option of receiving their dividends in the form of shares instead of cash.
Participation in this scheme would most likely be optional and the acceptance of cash dividends should be the default option. To qualify for new shares through the SDS, a shareholder would have to complete the Notice of Election and return in to the company or The Central Depository (Pte) Limited.
If the scrip dividends are chosen, the shareholders would be able to participate in the equity capital without having to incur costs like brokerage fees, stamp duty and other related costs.
Hence bar intrinsic valuation and investment objectives, ceteris paribus, a shareholder should be indifferent between opting for either cash or scrip dividends.
Boardroom Limited (SGX: B10) also recently adopted the idea of scrip distributions and proposed a SDS to their shareholders in Sep 2013 as an alternative to their usual practice of cash dividends.
Rationales for the Scrip Dividend Scheme
From the shareholder’s perspective, the SDS, if adopted would allow shareholders the flexibility to elect and receive dividend payment as cash or additional new shares to meet their investment objectives. Increased liquidity would also be a regularly touted benefit.
From the company’s perspective, the rationales would include cash retained (Which would otherwise be made payable by way of cash dividends) to fund working capital and for capital expenditure of the company.
Why would there be a change to the market price after a SDS?
In general, to account for the increase of outstanding shares, existing shareholder would be offered the scrip dividends at an issue price at a discount of not more than 10% to the average of the last dealt prices over a pre-determined period of time.
Herein lies “a bird in hand is worth two in the bush” dilemma. Excluding the intrinsic valuation of the entity, the effect of this 10% discount would only be evident on an ex-post basis. This is due to the fact that only after the Notice of Elections have been compiled and allotments have been announced, would one be aware of the potential dilution involved in such an exercise.
Value In Action
A SDS is just one of many alternatives to reward shareholders and the focus should still be on the shareholder’s perception of intrinsic value as well as management’s intention for such an exercise.
The bottom line would be, “Would this exercise add value to current shareholders?”
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.