Scrip vs Cash Dividends

[mikh]

More and more companies are offering script in-lieu of cash. Although this is arguably to the company's advantage by conserving cash and encouraging "longer term investing", i do not think it is the same to small investors.

Most script dividends offer the shares at up to 10% discount off market price. Effectively, investors who decide to take cash lose out because their holdings are disporportionately diluted by others getting "cheaper" lots. On the other hand by accepting script, one invariably gets landed with odd lots - making transactions difficult. It further reduces liquidity if you are investing for yearly cash returns and possibly contemplating to adjust your portfolio and invest in other counters.

Script dividends appear to favour the majority larger investors simply because they will have less odd lots of significance for their holdings. However, i hardly see see anyone voting against this scheme or disagreeing to it at AGMs. Why is that so? Would be glad to hear comments.

[yeokiwi]

More and more companies are offering script in-lieu of cash. Although this is arguably to the company's advantage by conserving cash and encouraging "longer term investing", i do not think it is the same to small investors.

Most script dividends offer the shares at up to 10% discount off market price. Effectively, investors who decide to take cash lose out because their holdings are disporportionately diluted by others getting "cheaper" lots. On the other hand by accepting script, one invariably gets landed with odd lots - making transactions difficult. It further reduces liquidity if you are investing for yearly cash returns and possibly contemplating to adjust your portfolio and invest in other counters.

Script dividends appear to favour the majority larger investors simply because they will have less odd lots of significance for their holdings. However, i hardly see see anyone voting against this scheme or disagreeing to it at AGMs. Why is that so? Would be glad to hear comments.

Tuan Sing's minority shareholders did try to vote against scrip dividends but were bulldozed by major shareholders.
Personally, I do not favour scrip dividends. Getting real cash means that the cashflow and the cash in bank are real.
No real money no talk

[cif5000]

Most script dividends offer the shares at up to 10% discount off market price.

I haven't seen a scrip dividend that was issued without a discount.

If a company consistently uses scrip dividend, that's not good.

If it issues a one-time scrip to maintain its dividend record, most likely the cash flow is choked. Insiders should not take advantage of a 10% discount.

Ideally, scrip dividend should be issued at a slight premium. And if insiders take that up to facilitate cash flow, I'll be very impressed.

[KopiKat]

Most script dividends offer the shares at up to 10% discount off market price.

I haven't seen a scrip dividend that was issued without a discount.

If a company consistently uses scrip dividend, that's not good.

If it issues a one-time scrip to maintain its dividend record, most likely the cash flow is choked. Insiders should not take advantage of a 10% discount.

Ideally, scrip dividend should be issued at a slight premium. And if insiders take that up to facilitate cash flow, I'll be very impressed.

I must be very unlucky as the shares I hold offers DRP at less than 10% discount (SPAus - 2.5% ; Raffles Medical - 8%). Whether I decide to opt for DRP depends on,

1) The Discount vs Market Price - Sometimes, by the time I get the DRP notice, the Market Price may be lower than the DRP subscription price. In that case, I'll not opt for the DRP. This is usually the case of those which offers it at a low discount eg. SPAus

2) Long Term / Short Term objective - If my intent for that stock is long term in nature, I'd more likely opt for the DRP, especially if it's at a good discount. If the market price is lower, I may as well just grab from the open market. However, in the case of SPAus, my intent is not very long term in nature due to the currency risk (I'll sell my holdings if I see A$ weakening), so I'll very unlikely opt for DRP.

In addition, I don't see having odd lots as a big issue as there's no holding charge imposed by CDP even if I have only 1 share. It's a problem though if it's a CPF investment as the Nominee Banks imposes a holding charge (therefore may not be a good idea to go for DRP if you don't plan to hold for the long term and in larger qty).

[Musicwhiz]

Business Times - 15 Jun 2011

Hock Lock Siew
Scrip dividends: win some, lose some

By MICHELLE TAN

SCRIP dividend schemes have proven to be a 'god-send' for Singapore banks, especially during the last financial crisis as the issue of shares in place of cash in dividend payouts helped shore up capital, bolstering the banks' balance sheets. And the success of such schemes continues to perpetuate past the recessionary era, with more listed companies in other industries jumping on the bandwagon as well.

As an example of the success, OCBC Bank saw in its latest scrip dividend scheme a healthy shareholder participation rate of more than 80 per cent.

However, is the advent of such schemes more of a one-sided benefit taken at the expense of shareholders or do the tables turn on the issuers at some point?

For starters, a scrip dividend is typically paid out in the form of new shares from the company, though a shareholder reserves the right to choose between a cash dividend or one in the form of shares.

From the shareholders' point of you, if all of them take part in a company's scrip dividend scheme - admittedly an unlikely scenario - the net effect is like the company having just declared a bonus issue and effectively no one would have received a dividend.

And for shareholders who opt for the cash option, they would have effectively 'sold' off part of their ownership in exchange for cash and face ownership dilution as a result of the issue of new shares to those who opted for the scrip option.

Having said that, it is not all bad for shareholders.

For one thing, scrip dividends are usually issued at a discount. Taking the local banks, for example, they usually issue scrip dividends at a 5 per cent to 10 per cent discount to a VWAP (volume-weighted average price).

If need be, shareholders who opt for the scheme can arbitrage on the price difference between the discounted and market rate if they choose to pocket hard cash, which at times may amount to more than the value of the said cash dividend.

More importantly, with the scrip dividend scheme in place, banks and other issuers do not need to slash dividend payouts or resort to undertaking an untimely share placement in a downturn and antagonise shareholders who look forward to dividends in times of financial turmoil.

Contrary to popular belief, not all issuers benefit from issuing scrip. For the local banks, the scrip dividend scheme was borne out of crisis when the need for higher capital buffers was paramount.

However, with all three banks now possessing high capital buffers, raising capital is not so much of a necessity anymore. In fact, continuing to issue scrip dividends to raise capital will have the effect of lowering a bank's return on equity, consequently weighing on overall valuations.

Since the average shareholder and the issuer both stand to lose in certain aspects, who is the real beneficiary of this clever 'dividend invention'?

Probably the majority shareholders. Majority shareholders can use scrip dividend schemes to raise and consolidate their overall stake in the company cost-efficiently.

Typically, in the event a majority shareholder plans to raise his stake in a company, he would have to purchase shares from the open market, which usually tends to trigger a spike in share price.

However with scrip dividend schemes, a majority shareholder can up his stake in the company at a discount, and more importantly at the issuer's expense, as there would always be some minority shareholders who would opt for a cash dividend and face dilutive effects to ownership.

Furthermore, with scrip dividend exercises taking place so frequently nowadays, majority shareholders are better able to avoid the costly process of going to the open market to increase their stake as often as previously required.

This brings us to the point that in life there will always be some winners and some losers in every situation, and sometimes one has to discern and make the best of each situation presented instead of mulling over the gains of others.

[mikh]

[Tuan Sing's minority shareholders did try to vote against scrip dividends but were bulldozed by major shareholders.
Personally, I do not favour scrip dividends. Getting real cash means that the cashflow and the cash in bank are real.
No real money no talk

At the end of the day, it's the cash dividends that are important unless i want to leave odd lots to my descendents. Good to note that there is one company's minority shareholders who voted against it. Thanks for sharing.

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Ideally, scrip dividend should be issued at a slight premium. And if insiders take that up to facilitate cash flow, I'll be very impressed.

that would be impressive!

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2) Long Term / Short Term objective - If my intent for that stock is long term in nature, I'd more likely opt for the DRP, especially if it's at a good discount. If the market price is lower, I may as well just grab from the open market. However, in the case of SPAus, my intent is not very long term in nature due to the currency risk (I'll sell my holdings if I see A$ weakening), so I'll very unlikely opt for DRP.

In addition, I don't see having odd lots as a big issue as there's no holding charge imposed by CDP even if I have only 1 share. It's a problem though if it's a CPF investment as the Nominee Banks imposes a holding charge (therefore may not be a good idea to go for DRP if you don't plan to hold for the long term and in larger qty).

i just feel that if one wishes to "play" the market timing game, its better with cash on hand than with this scrip option which largely limits choices. Holding odd lots, say 10 shares just means you are unlikely ever to cash out because your brokerage fee will cost you that much more (unless you go Stanchart etc).
From the company's POV, perhaps its no wonder they end up with so many super-minority shareholders. I am often "impressed" by companies sending me thick ARs and inviting me for AGM (+lunch) when my share worth is < $50! Surely, that's a poor way to manage shareholder funds.

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[jackphang]

I prefer dividend. CES is currently offering near to 10% dividend yield and it's still growing.

[mikh]

Business Times - 15 Jun 2011

Hock Lock Siew
Scrip dividends: win some, lose some

By MICHELLE TAN

...Contrary to popular belief, not all issuers benefit from issuing scrip. For the local banks, the scrip dividend scheme was borne out of crisis when the need for higher capital buffers was paramount...

....Since the average shareholder and the issuer both stand to lose in certain aspects, who is the real beneficiary of this clever 'dividend invention'?

Probably the majority shareholders. Majority shareholders can use scrip dividend schemes to raise and consolidate their overall stake in the company cost-efficiently.

Typically, in the event a majority shareholder plans to raise his stake in a company, he would have to purchase shares from the open market, which usually tends to trigger a spike in share price.

However with scrip dividend schemes, a majority shareholder can up his stake in the company at a discount, and more importantly at the issuer's expense, as there would always be some minority shareholders who would opt for a cash dividend and face dilutive effects to ownership.

Furthermore, with scrip dividend exercises taking place so frequently nowadays, majority shareholders are better able to avoid the costly process of going to the open market to increase their stake as often as previously required.

This brings us to the point that in life there will always be some winners and some losers in every situation, and sometimes one has to discern and make the best of each situation presented instead of mulling over the gains of others.

This article articulates well that it is generally the majority shareholders who will benefit, and in more ways than one.

Despite what the article says about saving cash, i am seeing more of my counters offering scrip even in the current environment where cash is supposely a plenty.

For a rather esteemed byline, what the article fails to highlight is that this exercise penalises the minority shareholders who prefer to receive cash, by diluting their holdings. Minority shareholders should vote against this resolution at AGMs if they prefer cash. Never mind if they might be out-voted (as in case of Tuan Sing), but the point should be made.

Stating that "sometimes one has to discern and make the best of each situation presented instead of mulling over the gains of others" is just accepting that a company can act against the interest of minority shareholders with nary a whimper. The majority SH's gain is at the minority SH's loss. I do not see how this is equitable amongst holders with common shares of equal right.

[Nick]

Personally, all dividends should be in cash. If the company cannot afford it, it should not be distributing a dividend in the first place. If everyone took up the script dividend, then in reality, no one gets diluted and no cash leaves the company so in other words, the 'dividend' becomes a bonus issue. I also find it odd that 2 trust had taken the DRP scheme a couple of years ago - Cambridge REIT and FSLT. Aren't they supposed to provide long term cash distributions to shareholders ?