[Abstract – The Covid-19 pandemic has pushed many companies in an effort to conserve cash to maintain liquidity. Consequently, many companies, have introduced the scrip dividend scheme in hope to beef up company cash hoards to cushion this trying time. In particular, apart from 40% cut in dividends, all the three banks have included scrip dividends offer in hope to attract shareholders to take up the dividends in the form of scrips instead of cash. The mechanisms and technicalities have already been repeatedly mentioned by many chat groups and, therefore, require no further explanations. Preceding this blog post, I had made a simple program using excel to help shareholders how to calculate the quantity of entitled scrips if one were to forgo cash dividends for the scrips. As always, the big question to shareholders is – is it good to take up the scrip dividends or cash dividends? In this article, we shall made use of the excel file to help us calculate maximum increase in the float size if every shareholder were to subscribe to the scrip dividends. This helps us better analyse the impact of scrip dividend distribution on us as shareholders.]
First and foremost, the most apparent benefit to shareholders is that scrip dividend distribution helps instil discipline. Each time when we get scrips as dividends, they add to our shareholdings. This help to maintain our stake in the company, and may even increase our stakes if many other shareholders chose to take up cash dividends. By continuing doing so for the scrip dividend exercises, we are effectively reinvesting our dividends, thus making the power of compounding work for us. But remember, the scrips come with a cost. They are not free. We have to forgo our cash in exchange for the scrips. Furthermore, many people may have overlooked it, by maintaining our stake, we are effectively maintaining our risks in the company as well.
The other advantage, though much less obvious one, is that one need not have to pay the brokerage and all the other fees to have the scrips. Unless you are substantial shareholder, the quantity of the scrips is usually quite small. If we were to buy those scrips in the open market, we need to pay a minimum brokerage charge, typically of around $25. And with other fees thrown in, it comes to be about $30.
But then, scrip dividend has its downside too. The most obvious one is the shareholders are end up with odd lots, which makes selling difficult. Very often, shareholders need to sell rounded board lots of 100 shares in order to amalgamate with the odd lots to justify paying for the brokerage charges.
Another huge disadvantage to shareholders is that scrip dividends lack flexibility. The conversion price is fixed at a certain point in time. If the trading price, during days right up to the scrip dividend election submission date, continually trade below the conversion price or if shareholders perceive that the trading price is going to fall below the conversion price in future, the take-up rate is likely to be low. This can happen especially if the company did not give discount for the scrip dividends.
Given that all the three local banks are in the midst of scrip dividend exercises for the respective Q2 and H1 2020, it is opportune to discuss the effects of scrip dividends using the banks’ proposed scrip dividend scheme as the backdrop. In a nutshell, DBS and UOB are distributing scrip dividends without discount while OCBC is giving a 10% discount to the final price based on the volume weighted average trading price during a set of stipulated trading days. The dividend rate and the conversion price can be found in Table 1, cut and pasted from the excel file that we programmed in the last blog post.
Based on the shareholder’s statistics, we should be able to approximate, the quantity of new shares that are expected to be issued if all the shareholders of the respective banks entirely subscribe to the scrip dividends.
For DBS, the increase in percentage is about 0.8%. Given that it is distributing dividends quarterly, we should expect a maximum increase of 3.2% for the 4 quarters ending in Q1 2021. For UOB, maximum percentage increase is about 1.6%. Given that it distributes dividends half yearly, the maximum increase is also about 3.2% for FY2020. OCBC has a biggest dilution, of about 2% in this exercise. If the scrip dividend scheme is also applied to 2nd half of the year, the maximum increase in the float size is about 4%.
The statistics of the shareholding also shows that median lies in the lower part of the 1001-10,000 segment for OCBC and UOB and the upper part of the 100-1,000 segment of DBS. Shareholders that fall in the segments below the median could hardly move a needle in the total float size even if every shareholder subscribes to the scrip dividends. On the other hand, shareholders in the 10,000 to 1,000,000 shares segment, and those in the 1,000,001 & above shares segment have significant effect on the dilution if they subscribe to the scrip dividends. This partly explained why OCBC has significantly more shareholders with more than 1 million shares compare to the other 2 banks as it has offered more scrip dividends in the past.
Against this backdrop, we also need to know the take-up rate for the scrip dividends. The recent trading price of DBS consistently lingers below the scrip conversion price of $21.04, based on the volume weighted average trading price between 14 August and 17 August 2020, both dates inclusive. Of course, we do not know the DBS trading price going forward as we get nearer to the scrip election submission closing date on 11th September, but based on the recent trading price, it appeared indicative that the take-up rate is going to be very low unless it perks up suddenly as it approaches the date. If the take-up rate is low, it is certainly less dilutive.
For UOB, the conversion price lies either below or around the lower end of the trading price range. So comparatively, the take-up rate for UOB should be higher than DBS. However, stipulated dates to determine the conversion price is set much later (26 & 27 August 2020) and the date for the submission of the scrip election is also two weeks later, so it is still early to draw any inference on the take-up rate for the scrip dividends.
For OCBC, the scrip dividend take-up rate is likely to be much higher given that it offered a 10% discount to the volume weighted average trading price on dates set between 24 August and 27 August, inclusive. Given that the on-going trading price has been relatively range bound between $8.50 and $9.00, it is expected that many shareholders would convert to scrip dividend. The 10% discount provides a good price buffer for shareholders. However, I consider it as a hygiene factor at best. Remember, the 10% discount is not just for a particular shareholder alone. Every shareholder enjoys the same percentage discount if he takes up the scrip dividend. Obviously, this is a good incentive for the heavyweight shareholders, and to a lesser extent, the smaller shareholders. In the extreme case, if all shareholders were to take up the scrip dividends, the stake of each shareholder remains unchanged. Even taking away those that have overseas mailing address and those who decide to take up cash dividends, the increase in the stake of OCBC could not even move the third digit after the decimal point in percentage terms. However, if we decide not to subscribe to the scrip dividends, we would obviously lose out, as in all likelihood, many shareholders are going to subscribe them. Hence, shareholders may be put in the position to go for the obvious unless they need cash urgently.
In a situation, whereby a shareholder’s holding gets bigger, the most ideal condition is that the stock price gradually increase over time. I believe other shareholders felt the same way, OCBC stock price has not been moving up for the past few years. It has been around $10-$11 a few years ago, then about $9 to $10 one to two years ago. Now with the Covid-19 pandemic, the stock price has been lingering below $9. Despite converting at a discounted price of 10% in the last few scrip dividend exercises, it has been largely negated by the gradual slip in its share price. From past experience in the scrip dividend exercises, even with 10% discounts, the current trading price still lingers below the past discounted prices. My calculation using the excel file shows that each exercise could introduce as much as 2% into the float. While, it may appear small for one exercise, its effect is cumulative. It is a blunt instrument. With other schemes such as employee option scheme thrown in, we can certainly feel the effects of its dilution as more and more shares are issued. It puts a huge lid on the share price. This instrument may be an easy way out, but it can be highly toxic if it is used too excessively. I bet this is the reason why UOB and DBS did not give any discounts.
Declaration – The writer owns shares in DBS and OCBC.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.