DJ Stockbridge is currently pursuing a Masters degree in Accounting.
Cash or Shares
''Soft serve or hard serve ice cream,'' Coke or Pepsi,'' ''soup or salad'' It's always good to have options. How about ''cash dividend or shares?'' In fact, that's the question the issuing company asks if it offers a SCRIP dividend program. As an investor, you have the option to either receive a cash dividend or the equivalent amount in shares of the company.
In this lesson, we'll discuss a SCRIP dividend program in further detail, and we'll describe the advantage and disadvantages of this program both for the shareholder and for the company.
A SCRIP dividend program is when companies offer their shareholders the right to receive dividends in either the form of cash or shares in that company. For example, let's say Widget Inc's share price is $50. They pay $2.50 once per year as a dividend, and you own 100 shares. If Widget Inc. has a SCRIP dividend program then you can either receive 1) $2.50 x 100 shares = $250 in cash, or 2) $250 / $50 = 5 additional shares in the company.
Shareholder: Advantages and Disadvantages
Advantages for the Shareholder Include:
- They are given the option. It is always good to have options, because then you can pick the best choice for you. Shareholders, in particular, have different needs. One investor may be a retiree who depends on cash dividends to pay their living expenses. They would choose the cash dividend option. On the other hand, a younger, wealthier investor may want to own more shares so they can capture future price appreciation. The SCRIP dividend program allows each shareholder to be happy.
- If a shareholder also thinks the shares are undervalued, they would like the SCRIP dividend and would elect to receive shares. In fact, they will not have to pay transaction costs which they would have incurred had they bought the same number of shares through their brokerage account.
Disadvantages for the Shareholder Include:
- Unfortunately, if a shareholder elects to receive shares, instead of cash, they still need to pay ordinary income tax on the receipt. If the shareholder does not have the cash available on hand, they may be forced to sell some shares to cover the tax liability.
Company: Advantages and Disadvantages
Advantages for the Company Include:
- A SCRIP dividend may help the company save cash. For every shareholder that elects shares, it saves the company cash. They can then use the extra cash on hand for their operations or to pay down debt, shoring up their balance sheet.
- The SCIRP dividend election results may help the company with its future capital allocation decisions. If they see that many shareholders are opting to elect shares, they may decide to invest excess money by buying their own shares. The logic is - 'If shareholders think the shares are attractive, the company should too.'
Disadvantages for the Company Include:
- Giving shareholders the option can create operational headaches. Instead of simply sending checks to all the shareholders, the company now needs to correctly record each shareholders option and send them what they want.
- Giving shareholders the option makes budgeting a bit harder because the company does not exactly know how much cash it will have on hand. For example, the company may get surprised by more shareholders demanding cash dividends. If they didn't anticipate this, then they may have to scramble to find all the cash they need. They may have to take cash that was originally going to another project or part of the company.
A SCRIP dividend program gives the shareholder the option to receive their dividend either in cash or in shares of the company. For the shareholder, it's always better to have more options than less, and this certainly applies with the SCRIP dividend. It however, can create some operational and budgeting problems for the company, but the company gets to retain extra cash for their operations.
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