Do we de­tect a trend to of­fer­ing scrip div­i­dend?

Money or the stox?

Finweek English Edition - - Front Page -

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.”


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