Scrip Dividend - how to treat them in valuation?

[CityFarmer]

My personal view is that the issuing of scrip dividend is not done with the benefits to minority shareholders in mind. Let's have a thought experiment:

Take the extreme case in which every shareholder opt for scrip. Everyone will end up with the same percentage ownership in the company as before (save for fractional entitlement). Cash is retained in company. So company pacified shareholders' demand for dividend without really changing anything. But something has changed: shareholders will end up with odd lots! While it isn't a problem for the majority shareholder, transaction cost will be higher for those who want to round up/down/exit their holdings.

Take the other extreme in which only the majority shareholder opts for scrip, while others opt for cash. In this case, the majority shareholder raises his/her stake in the company at the expense of the other shareholders. It's equivalent to paying everyone a cash dividend and then doing a private placement to the majority shareholder at a discount.

Reality will be somewhere between these extremities. So those who opt for scrip raise their percentage ownership at the expense of those who opt for cash, the extend of which increases with the discount in scrip price, and with the majority shareholder being the biggest beneficiary. Again the issue of odd lots arises for those minorities who have opted for "discounted" scrip.

If companies are altruistic about rewarding shareholders, I'd prefer that they do it via cash dividends, and let those who wants to raise their stakes in the company do so via share purchase from the market using those dividends.

Scrip dividend with discounted price is the norm. Scrip dividend without discounted price is meaningless, and will be better to let shareholders do their own purchase from open market.

Odd lot is not an issue. Most trading platforms allow online trading of odd lot, with similar commission rate.

[quidam]

Here's a different way to look at it. I'll use a real example to illustrate:

Company X declared a $0.015 final dividend, with Scrip Dividend Scheme. Issue price of scrip was decided to be $0.21, which represented about 9.5% discount to price around XD. So for those who opted for scrip, for every share that they had, instead of receiving $0.015, they would be getting 0.07142857 new shares instead (1.5/21).

This whole exercise is essentially equivalent to Company X giving a $0.015 final cash dividend, together with a 0.07142857-for-1 NON-RENOUNCEABLE rights issue at $0.21. Basically those who opted for scrip are those that take up the right and pay up, and those that opted for cash forfeited their rights.

Now, we often hear complains about companies giving dividend, followed by rights issue ("give money already then take back again?!"). So why should this exercise of dividend payment, together with rights issue at a weird factor which is an irrational number, with the rights being non-renounceable (you either take it up or forfeit, you can't sell those "rights"), be celebrated or encouraged?

[CityFarmer]

Here's a different way to look at it. I'll use a real example to illustrate:

Company X declared a $0.015 final dividend, with Scrip Dividend Scheme. Issue price of scrip was decided to be $0.21, which represented about 9.5% discount to price around XD. So for those who opted for scrip, for every share that they had, instead of receiving $0.015, they would be getting 0.07142857 new shares instead (1.5/21).

This whole exercise is essentially equivalent to Company X giving a $0.015 final cash dividend, together with a 0.07142857-for-1 NON-RENOUNCEABLE rights issue at $0.21. Basically those who opted for scrip are those that take up the right and pay up, and those that opted for cash forfeited their rights.

Now, we often hear complains about companies giving dividend, followed by rights issue ("give money already then take back again?!"). So why should this exercise of dividend payment, together with rights issue at a weird factor which is an irrational number, with the rights being non-renounceable (you either take it up or forfeit, you can't sell those "rights"), be celebrated or encouraged?

Assessing the merit of scrip dividend without considering the purpose of the corporate event, is meaningless.

We celebrate or encourage the scrip dividend come with a hidden assumption i.e. the company will re-invest the proceed with a better return.

If right issue has similar effect, i will welcome it.

[wsreader]

Odd lot is not an issue. Most trading platforms allow online trading of odd lot, with similar commission rate.

actually, that is the issue.

[specuvestor]

I think forumers are not differentiating the diff in cashflow.

Doing a special dividend first and then rights shows that the company actually has cash to payout first. Doing a straight script or bonus issue does not gives you such "guarantee". Everyone knows how to read balance sheet but nobody except management knows how much cash they "really" have. That is why the market will differentiate between the 2 and why finance 101 is wrong.

Similarly I was saying at an AGM that "refinancing" and "restructuring" of debt are very different with different implications, though they may be similar in conditions academically.

In general if choosing between script and cash, it will be as CityFarmer mention, whether is it at a substantial discount, otherwise might as well pay us cash and give us option to buy from market (assuming zero transaction cost). But more importantly is that you believe the intrinsic value is way higher and opportunity cost is limited which is why you want to reinvest in THE SAME COMPANY. Dilution is less a concern for mere investors like us, it is a major consideration for business owners. There is a difference.

[zhangwuji]

After reading this thread, I think I need rebook at my stocks that offer scrip dividend scheme. Can we quote the actual companies for discussion here?