Thursday, November 04, 2010

Scrip Dividend Scheme - The Details

Dear all,

I am sure for long term investors like me, one will encounter the scrip dividend scheme from time to time. Basically, scrip dividend scheme is intended to give shareholders a choice to convert their entitled dividend payout to more shares in the company. The subscription price of the scrip dividend scheme is normally given at a slight discount from the market price, in order to make it more attractive for shareholders to subscribe to the scheme and for the company to retain cash for its usage. One do not need to pay any brokerage/transaction charges in order to convert the dividend into shares. There are basically four common options for shareholders when it comes to this scheme:

1. Election to participate in the scheme for this dividend payout only. All dividend entitled will be used to participate in this scheme.
2. Permanent election to participate in the scheme, whenever it is applicable.
3. Election to participate in the scheme for this dividend payout only. Part cash, part share option.
4. Do nothing. That is, one choose not to participate in this scheme at all and dividend will be paid fully in cash.

Option 2 to me is a "blank cheque" issued to the company. Basically, one is confident of the company and decides to participate in any scrip dividend scheme that comes along, regardless of its subscription price. It actually meant that one has no control as to whether they think that the subscription price is overvalued or not. Once a shareholder selects this option, he will automatically be given shares for each dividend payout declared. He can, however, opt out of this option in writing anytime if he wishes to.

Option 1 is a more common option and most investors that I encountered tends to prefer this option. It gives them the flexibility to decide whether to subscribe for the scheme every time it comes along. However, flexibility comes at a price. Some investors tend to be forgetful and might not have submitted the form before the deadline, thereby missing out on that particular scrip dividend subscription. Also, option 1 is not foolproof. It gives the company a leeway to decide how much shares they wish to allocate to you on your full entitled dividend payout based on a given formula. Normally, the computation will result in decimal places and your number of shares allocated might be:

i. Rounded to the next whole number. Which means, even 2.01 is rounded to 3 shares. This is of course to your advantage at all times.
ii. Rounded up or down to the nearest whole number. This is of course can be to your advantage or disadvantage (depending on whether you are rounded up or down), but at least it is mathematically reasonable.
iii. Take the whole number, ignore the decimal places, even if it is 0.99. For example, 2.99 is considered only 2 shares in this case. This is not to your advantage in almost all cases, unless of course the computation results in a nice whole number.

The residue sum after the above computation (for ii and iii only) might be given out as dividend payout or simply ignored for some companies. Which means, a shareholder can "lugi" a few dollars or even up to more than $10, if the residue amount are not paid out as dividend after computation.

Option 3 is a good option and this is my preferred option. What this means is that you decide how much cash you want to receive and how many shares that you wish to convert for every scrip dividend payout. It also avoid the computation formula problem that I had stated earlier as I decide how many shares that I want to use for computation and the rest I take as cash. I would not have a problem of having to "lugi" the residue sum after computation for companies who do not payout those residue amount. Common mistakes I see investors committing in this option:

i. Putting decimal places in the boxes for part cash and/or part share.
ii. The total number for part cash and part share doesn't tally with the total number of shares one is holding at book close date. For example, you hold 100 shares and you put 50 shares for part cash for 49 shares for part cash. What happened to the remaining 1 share? Doesn't make sense.
iii. Putting in the number of scrips that you are entitled to for the scrip dividend scheme in the part share box. Remember that you need to fill in the number of shares that you are holding at book close date that you wish to convert into scrip, and not the scrip that you will be given.

All the above will result in your application for scrip dividend scheme to be rejected so please check carefully before you submit.

Option 4 is of course self-explanatory. Doing nothing meant that you don't get any scrip and you get to keep the dividend. Your stake in the company will be diluted by the new shares being issued under the scrip dividend scheme for the other shareholders.

As they said, "the devil is in the details". But once you understood all the options available and select the correct one, scrip dividend scheme can be a fruitful exercise for long term shareholders like me who prefer to be almost fully invested at all times.



Blogger cif5000 said...

I didn't know one can choose No. 3. Thanks for this great write up.

6:23 AM  
Blogger Singapore Stock Picker said...

hey ghchua,

here are some points and questions i think you can answer and then expand in this post.

1. mostly bigger companies have dividend scrip but then some have through the years discontinued them due to poor participation. i read it on an article written by goh eng yeow of straits times.

2. it would be good to include the fact that the shares issued will be a discount to actual market price, or sometimes a weighted trading average price closer towards book closure date. this means that more shares are allocated through the scrip dividend than if you took the cash dividend and use it to buy more shares.

3. my own question is, assume you are entitle say 40 shares as a result of the scrip dividend. when you want to dispose odd lots, what are the charges and how can you go about doing that? can you sell odd lots through your internet platform?


1:34 AM  
Blogger ghchua said...

Hi Singapore Stock Picker,

1. My comment will be that some investors buy companies due to their attractive dividend. Some of them are retirees and they would prefer to take those dividend in cash instead, since they are not working and treat dividend as passive income. I guess what companies could do to make scrip dividend attractive is to price it at a greater discount, but that might mean more dilution for shareholders who didn't take up the scrip.

2. Yeap. I did mention it in my post. "The subscription price of the scrip dividend scheme is normally given at a slight discount from the market price, in order to make it more attractive for shareholders to subscribe to the scheme and for the company to retain cash for its usage"

3. Yeap. POEMS unit share platform could be used to buy/sell odd lots, at a minimum brokerage of $10.

6:54 PM  
Blogger manikam said...

Hi ghchua, I was surprised to learn that I can't elect for permanent scrip election for my JMH shares (see the reply from them). Is this the same for other companies as well?

We would advise that the permanent scrip election is not available to CDP depositors holding JMH shares in the scripless system. If you wish to receive scrip in lieu of cash dividend, you would need to complete the Form of Election and submit the duly completed and signed form to CDP, and to reach them no later than 17 September 2010.


As mentioned, if you hold the JMH shares through CDP in the scripless system, you would need to make a fresh scrip election at each dividend payment to which a scrip dividend scheme applies, if you wish to receive the dividend in the form of shares.


3:48 AM  
Blogger ghchua said...

Hi manikam,

There are some companies which might not have all the options available. For JMH, I understand that they actually have a permanent election for scrip dividend in place. I think it might be a "technical" issue that scripless system in CDP could not handle the permanent scrip dividend election by JMH.

However, if you hold physcial share certificate of JMH, you should be able to elect for permanent scrip dividend.

Hope that the above clarifies.

8:06 PM  
Blogger manikam said...

Thanks for the info - too bad I don't hold physical shares. It makes it troublesome to opt for scrip when I'm not in Singapore during the exercise.

Do you know where I can get a list of companies offering scrip dividends, instead of having to click on each company's profile on the SGX website?

5:02 AM  
Blogger ghchua said...

Hi manikam,

I guess there is no quick way to search for scrip dividend. One fast way is to browse through the corporate actions of the companies and see which ones are doing the scrip dividend.

However, do take note that even if the company have the scrip dividend scheme in place, they might not want to do it for every dividend that is being declared. Therefore, there is no sure way to know whether there will be a scrip dividend coming along, but past track record of the company might be a good guide for you.

8:48 PM  
Blogger cif5000 said...


From you memory, have you come across scrip dividend where the issue price was not at a discount?


9:41 PM  
Blogger ghchua said...

Hi cif5000,

Don't think so. But they are taking the average of the share price for a period of time and then discount it. So, if the market is not doing well between the period when they take the computation and the time where you took the scrip, then yes, it might not be a discount and the scrip price might be higher than the current market price.

11:27 PM  

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