Friday, August 29, 2008

Scrips dividend

A fellow forum user asked me to explain the basics of scrip dividends. Here is my response. I thought that it's important to highlight this (even though the question is on MIIF) because one of the companies that I have partial ownership on - Pac Andes - is also going to do scrips dividends.

-------------------------------------------------------

There are two ways that companies can distribute cash - one is through cash (the normal route) and the other is through scrips dividends. I have the fortune of investing in two companies that offer scrips dividends, so I have a little bit of experience dealing with both.

Scrips dividends works like this basically:

1. Pays you the dividend in cash, but instead of you taking the cash, they buy more shares for you using the cash distributed to you from the dividends. The formula works like this:

New scrips obtained = (number of shares held at book closure date x amount of dividend distributed per share)/Issue price

2. To buy the shares using the dividends distributed, they have to use an issue price to buy. For the case of MIIF, the issue price is the arithmetic average of the daily volume weighted average price of a MIIF share during the pricing period of 5 market days from 29th Aug to 4th Sept inclusive. You do not have to do the calculation yourself, as they will issue another statement of the actual issue price on 5pm, 4th sept.

For some companies, in order to entice shareholders to subscribe to scrips dividends, they will offer a discount to this issue price. But for MIIF, there is no such discount.

To illustrate, let's say you are given a dividend per share of 0.20 cts per share. You held 10 lots at book closure and the issue price is \$1.15.

No.of scrips obtained = (10,000 x 0.20)/1.15 =1739.13

Since the scrips are usually rounded down, you'll get 1739 new shares, making your total share holdings at 11 lots 739 odd shares.

(for hsbc, the rounding is carried forward to the next interim. So, the 0.13 not 'used' will be added to the next round of scrips dividends. I doubt MIIF practise that as it's a major admin problem)

3. You can opt to take part cash dividend and part scrips dividends, by putting in the amount in the form that they will send you.

Possible impact

1. As they offer scrips dividend, they will have to dilute their shares outstanding slightly by issuing more shares. If you didn't subscribe, your ownership of the comany dilutes a little. If you subscribe to the scrips, then there is no change to your ownership.

2. Subscribing it will subject you to having odd lots. Might make it harder to divest your shares as the odd lots have to be sold in unit share market or through broker only. For long term investor on the company, it is not a problem.

3. Subscribing will compound your returns on the company better than if you reinvest the dividends yourself from open market purchase and there are no brokerage costs incurred. However, in open market purchase, you can decide the price and time (and amount) to invest, whereas for scrips, they will determine everything but you do not have to pay for brokerage.

For more reference, you can refer to musicwhiz's blog on pac andes, as they are also issuing new scrips soon. It's the post dated 9th July, 2008

----------------------------------------

For Pac andes, the issue price is 0.44 per share, with no discounts to it. I'm supposed to return this form "Scrip Dividend scheme - notice of election' to them by 5pm, 4th Sept, 2008, if I opt to receive shares instead of cash. If I do not wish to obtain shares and opt for cash instead, then I do not have to do anything at all. There is also an extra option to choose shares for all future dividends in the form.

Since the market price of Pac Andes currently is 0.365, I doubt there is any advantage of subscribing to scripts dividends. I suppose most other investors would choose to do the same as well, as the price difference between the issue price of 0.44 and the market price of 0.365 is simply too huge to offset the benefits of not paying commissions.

As such, my decision is not to do anything, which means I'll be taking my 2.07 cts per share of dividends :)

Mike Dirnt said...

Hi LP,

The rounding problem is not a big issue to me. The excess is almost negligible of the dividends amount. At least, i can reinvest my dividends without the need to buy myself and incurring brokerage fees.

Personally im participating in scrip dividends for MIIF

la papillion said...

Hi Mike,

Ask you something: If the open market price is cheaper than the issue price of MIIF, would you still opt for scrips? If it's much cheaper, the brokerage might not be good to cover the price differences too.

Anonymous said...

Hello La Papillion

I do not think the companies buy from open market unless they really feel that the market price is really undervaluing the underlying business.

Most firms in such schemes (in SGX) simply issue new shares.

The cynic in me see this more as a working capital management.

Instead of issuing cash dividend, a scrip dividend alternative keeps the cash in the firm for future use by mgt.

For the record, Jardine Cycle & Carriage stopped its scrip dividend scheme. :p

DSEA

la papillion said...

Hi anonymous,

You're right. Companies do not always buy from open market. BUT even if they buy, it also doesn't mean that the shares are undervalue. All depends on the management. I've seen Aztech buying their shares, but nothing seems to work out well.

I also think that scrips is a way for company to preserve their cash holdings for working capital needs.

Maybe for C&C, the scrips dividend isn't popular? haha :) Thks for your comments :P