Scrip dividend (2)

Since the last post on scrip dividends, there is still a need to broach on the subject further. In fact, taking scrip dividends appeared to have more downside compare to taking cash dividends during a recessionary period like now.

Many of us are aware that taking scrip dividends in lieu of cash is a form of delayed gratification to help us compound our shares. It is a universal fact proven by mathematics. The effect of compounding is so powerful that even Albert Einstein claimed it to be the 8th Wonder of the World. That said, this is generally well and good when the share price is held relatively steady or when it is trending upwards. What happens if the share price is erratic or volatile or trending downwards like what it is now? Take DBS, for example. It announced the scrip dividend offer on 6 Aug 2020, which was to base on the conversion rate of the last dealt price from 14 Aug to 17 Aug. This resulted in the conversion price of $21.04 for this scrip dividend exercise. Since then, there was not a single day, in which DBS share price ever crossed $21 per share, let alone hitting $21.04. It is a short-term situation of pump and dump. In fact, long-term investors would have been better off taking the cash dividends, use the same dollar amount and buy from the open market anytime along this period. Unless our quantity of entitled scrips was far too low, even after paying for the brokerage charges and all the other additional fees, we probably ended with a few more shares than to take up the scrip dividend. In fact, a more disciplined way (if we really want to put the power of compounding into practice) would be to take the cash dividends and buy rounded lots of 100 shares from the open market. In this way, it would help to avoid ending up in odd lots, which by itself, can present another obstacle when comes to selling.

With no discount offered by the bank, it does not make sense for shareholders to take scrip dividends. In fact, given no discount, it also meant that the bank was not desperate for cash conservation. Certainly, it was a non-event as far as this scrip dividend exercise is concerned. Perhaps, the only advantage for DBS in this case was able to delay the dividend distribution by a few days due to the administration pertaining to the scrip dividend exercise.

Also on banks, lying on the other extreme is OCBC. Its conversion price was to discount at 10% below the volume weighted average price on the stipulated dates between 21 August and 24 August (inclusive). This resulted in the conversion price at $7.81 per share.

Since 24 August, OCBC share price has been way above the conversion price of $7.81. Thus, it makes economic sense for shareholders to take up the scrip dividends. In this way, it helps long term-investors compound their shareholding. But here is the irony. Due to market uncertainties, shareholders may think short-term to sell into the market to lock in profit. While there may be many reasons for shareholders to sell a stock, this is certainly one of them. In the way, instead of encouraging shareholders to hold stocks for the long-term, it gives rise to short-term trading. Based on my last post, each time when OCBC offers script dividends, it effectively increases the float by about 2% as every shareholder is likely to subscribe to the scrip dividend. As the float size gets bigger, the quantity release into the market actually compounds over time, meaning that the float size gets more and more at an increasing rate each time. If OCBC were to offer scrip dividends twice a year, then the percentage increase would also double to about 4% per year, not including additional shares issued for directors and employees under the shares option scheme.

While on paper, it appeared to be attractive for shareholders at a 10% discount, the shareholder’s value has been consistently sabotaged by the gradual price descent, especially in the recent years. If we browse through the OCBC past conversion price, it has been on a gradual decline. In all the scrip dividend exercises, none of the conversion prices went below $7.81, except for those in 2008 and 2009, which were periods during the global financial crisis. During the past 5 years or so, OCBC’s bottom line or net profit has been on the rise. However, the share price, in these 2 years or so has been on a decline, surfacing the dilutive effect of scrip dividends over the past several years.

While people may argue that shareholders need not take up the scrip dividend, I think shareholders were being put in a position to take up scrip dividends due to the 10% buffer between the conversion price and the trading price. If one does not take up the scrip dividend offer, his stake (however small) would be diluted. And this would continue to be so if the bank keeps offering script dividends. If you ask me whether the discount of 10% is good for shareholders. Frankly I do not think so because it affects all shareholders equally (percentage wise). And if shareholders did not subscribe to them, they lose out. So, in the sense, shareholders are ‘cornered’ to take up the scrip dividend and this has a long-term dilutive effect on the share price. Unless the bank can consistently bring up the bottom-line, compounding at a rate of 2% to offset the dilution, the share price would continue to be weak, or at best, stay stagnant. In the past 10 years or so, OCBC offered scrip dividends at least 12 times in total. In my opinion, scrip dividends should be used sparingly. Perhaps, OCBC should not even offer a discount. This would meaningfully provide a real choice to shareholders, just like DBS and UOB, whether to take up cash or scrip dividend.  I believe OCBC’s consistent offer of 10% discount in the conversion price is probably is to build up a huge war-chest for some huge expansion plans in the years ahead.

In the meantime, happy mid-Autumn festival (a belated one).

(A self-made 3D-printed lantern)

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.

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