Do we detect a trend to offering scrip dividend?
Money or the stox?
WITH TOUGH TIMES calling for tougher measures – especially the retention of a cash safety cushion – could we see more listed companies offering scrip awards as an alternative to traditional dividend distributions? The trend of offering shareholders an option of a scrip dividend in lieu of a cash payment was probably last seen as a fairly regular feature among listed companies in the “grind years” during the early and mid-Nineties.
While the habit of offering shareholders a “money or the stox” option has dissipated somewhat, there are still companies that subscribe to a policy of offering a cash alternative. Though such companies are few and far between, Nedbank and Old Mutual continue to offer shareholders a choice between cash or scrip. AECI, Foord Compass and Sasfin are three wellregarded second line companies that have also offered shareholders a choice between money and paper over recent years.
The question about a new trend in scrip offerings was really spurred by recent decisions by two top small cap companies – recruitment specialist Adcorp and empowerment investor Brimstone Investment Corporation – to offer shareholders the alternative of a scrip dividend. It will be interesting to see how shareholders respond to the option. Brimstone was due to publish the results of its dividend options on 24 May.
Brimstone, for one, has the partial unbundling and listing of Life Health Care to entice shareholders to look long and hard at taking more paper (N-shares, to be specific) rather than pocketing a 32c/share dividend.
On the other hand, Adcorp has also provided shareholders a bit of an incentive to take paper. The scrip dividend has been pitched at 1,1 times the value of the cash payout of 115c/share.
Frankly, the scrip dividend alternative looks like perfect fodder for the stronger small cap companies. Quite a number of such companies – despite the current economic ravages – are still capable of paying dividends. And these days a dividend – even a nominal payout – tends to lend credence to prospects, which in tough times a cynical market can discount.
With a number of share prices smacked down by general sentiment rather than company specific issues, there’s an opportunity to dangle an option of taking “cheap” paper in a promising company instead of the usual crossing of palms with silver. If the scrip option comes with a slight incentive – as in the Adcorp example – then all the better.
Of course, shareholders will have to weigh things up carefully. Nobody wants a handful of paper when the company’s share price continues to dribble down – a trading situation where cash in hand would be far more advantageous.
Stanlib small cap expert Shawn Stockigt says scrip dividends are understandable in prevailing circumstances where companies are often petrified of parting with hardearned cash. He stresses each situation has to be looked at individually when gauging the merits of a scrip offer alternative. “Cash flow, as always, is the key reference – especially in early growth stage companies.”
While most punters would understand the need to retain as much cash as possible, a company that can’t fund a dividend declaration from operational cash flow would run the risk of diluting shareholders’ value by issuing more scrip as part of a dividend.
Coronation Fund Managers small cap specialist Alistair Lea reckons more often than not his fund would take scrip. “The mere fact we own the shares to be eligible for the dividend would normally mean we like the share. So if offered more shares instead of a cash dividend we’d usually go for that.”