Take a close, hard look at scrip dividends

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#1
The Straits Times
Oct 30, 2011
small change
Take a close, hard look at scrip dividends

When markets are volatile, it may be better to go for cash payouts rather than discounted shares

By Lee Su Shyan

The lyrics from the song, You Can Run But You Can't Hide, certainly seem to apply to how the gloom has affected my approach towards investing.

Cash - eroded by inflation. Stocks and shares - battered and bruised. Currencies - far too volatile. Investment property - too big an outlay and who knows if there will be any tenants.

In the past few months, the only movement on my stock portfolio has been the award of scrip dividend shares to my account.

OCBC Bank, among several other companies, has a scrip dividend scheme, which allows shareholders to take their dividend in the form of shares or cash. It has always been a good bet, I believe.

This is how it works: Assume I own 1,000 shares. Based on OCBC's final dividend for last year, which was 15 cents per share, that works out to a $150 dividend. Based on the current share price, the bank issues new shares at a discount.

The new shares were issued at $8.45 apiece, a discount of 10 per cent to the price over a few days during that period, giving an investor 18 shares for each 1,000 shares he owns. If I do opt for the scrip, my shareholding would rise to 1,018 shares.

Some shareholders are loath to deal with odd lots, so they don't opt for the scrip.

But I have always been in favour of taking it. Firstly, I get the shares at a discount. Secondly, given $150 in cash, I'm more than likely to fritter it away because the amount is too small to invest, so at least by taking scrip, I'm investing rather than spending. Thirdly, I'd also save on brokerage charges, assuming that I would have tried to buy the equivalent on the market.

More importantly, there's the power of compounding. I now have 1,018 shares, which will attract a larger dividend the following time round.

I've also gained a decent enough yield on the year. Last year, OCBC's total dividend was 30 cents which, based on an average price of $8.90, works out to 3.3 per cent. If I had the money in the bank, it would be getting not much above 0 per cent.

But in this volatile market, even this option does not appear to be such a sure-fire win.

Take my latest grant of shares from OCBC's interim dividend recently. The issue price for the new shares was $8.07.

At the point when I elected to accept the scrip, the shares were trading above $8.07. Subsequently, the shares fell to a low of $7.68. For about a week, the shares were below the $8.07 price.

In hindsight, it would have made more sense to take the cash, then buy the shares later.

In the case of DBS' latest interim dividend, the shares were trading below the issue price even during the period when the offer was open.

The issue price for the new shares was $13.14. During the run-up to the Sept 8 deadline, the stock market was hit by jitters and DBS shares fell below $13.14 and even below $13 on some days.

Both DBS and OCBC shares have bounced back since then, so it was a temporary scare.

To be on the safe side, one should not automatically opt for scrip. Instead, assess each offer that is made, based on the current share price and the outlook for the share price.

Detractors of scrip dividend schemes say they benefit the company and not the shareholder. After all, the company can conserve cash by not paying a dividend. With a participation rate by investors in this latest round at 83.1 per cent, OCBC would have saved a pretty penny from not dishing out that much cash.

With such a scheme in place, if I opt for cash and stick with my 1,000 shares, my stake is proportionately lower since the company is issuing new shares to other people. Still, owning 1,000 shares - or even a few thousand out of the millions of shares out there - means any decision I make is negligible.

The scrip choice works for someone who is a long-term shareholder, confident of the company and happy to build up his stake slowly rather than take the regular dividend payout in cash.

On the other hand, it represents a fairly cautious attitude, since the shareholder is raising his stake very slowly, rather than buying a few thousand shares in one shot.

Scrip dividend schemes have caught on among listed companies. Among the larger companies offering such schemes is DBS Group Holdings while the smaller firms include China Fishery and MTQ.

Assess each tranche of dividend by taking it as an investment decision to avoid being caught out.

In times of volatile markets, which is the situation now, anyone caught napping will be punished severely.

sushyan@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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