Corporate Actions - A Concise Guide - Francis Groves

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rely on a company’s dividend history as an indication of management skill and commitment to maintaining or (better still) consistently raising the dividend. [15]

      Along with high rate deposit accounts, shares with a high dividend yield are a favourite among those (known as “income investors”) who need to derive an income from their investments.

      Dividends – how they work in practice

      Normally the announcements of the interim dividend and the final dividend will accompany the publication of half-year results and final results respectively. The following announcement would be typical:

      Friday 14th March 2008

      “The Board remains confident in the Group’s earnings outlook and has decided to increase the final dividend by 5% to 25p per share. This brings the full year dividend to 39.9p per share, an increase of 5% on that paid for 2006. Going forward, the Board expects to grow the dividend gradually, while continuing to achieve greater dividend cover.”

      This would be followed by a timetable for the dividend payment:

      Shares quoted ex-dividend [16 – ] 28th March 2008

      Record date – 30th March

      Final Dividend paid – 21st May

      The AGM– 22nd May

      Scrip dividends (paper instead of cash)

      Whether the word scrip is derived from a scrap of paper or an abbreviation of subscription, the meaning is memorable enough; scrip dividends are an alternative of taking further shares in the company in place of a cash dividend. [17] A client will often be asked to decide as a matter of policy if they wish to receive scrip dividends (if offered) rather than the cash dividend when they first sign up with a stockbroker. However, ongoing arrangements like this are really a time saving convenience for the stock broking service and its clients; as far as the issuing company is concerned the shareholder normally has a choice between taking the scrip shares or the cash dividend. In the language of corporate actions they make an “election”.

      Scrip dividends are fairly common but by no means universal. For UK shareholders, receiving a scrip dividend has income tax implications.

      Scrip dividends should not be confused with DRIPs (Dividend Reinvestment Plans) – arrangements for shareholders to have their dividend spent on the purchase of more shares in the company. The difference is that shares for a DRIP are bought on the stock market and the (small) charges are deducted to cover stamp duty and dealing costs. Using a DRIP facility is not a corporate action in itself, merely a service provided by some issuers once the dividend payment has been made.

      Scrip dividends in practice

      Information about an issuer’s policy on scrip dividends is generally available on the issuer’s investor relations website. The issuer will require an instruction from the shareholder to confirm that they wish to receive their dividend in paper form. This could either be in the form of notification from the broker that this shareholder always opts for scrip dividends where they are available or a signed mandate from the investor that they wish this issuer’s dividends in particular to be paid as a scrip dividend.

      The ex-dividend date, record date and payment date for the scrip dividend will normally be the same as for the cash dividend.

      The scrip dividend is normally calculated by means of a scrip dividend reference price, a divisor applied to the cash dividend entitlement to work out how many shares the cash dividend equates to. The scrip dividend reference price is calculated according to a formula such as the average of the middle market quotations for the issuer’s shares on the five trading days commencing on the ex-dividend date.

      Re-invested dividends

      Over long time periods investors who can afford to re-invest dividends reap an enormous reward. For example, £100 invested in equities in 1945 would by 2007 have grown to £8511. However, with dividends reinvested, this figure would have been £131,369 – more than 15 times greater.

      Performance figures for managed funds are normally on a dividends re-invested basis. [18]

      Scrip issues

      Otherwise known as a bonus issue or a capitalisation issue, this is the issue of more shares to the shareholders in proportion to their existing shareholdings at no charge. The purpose of a bonus issue is normally to reduce a company’s retained earnings (reserves) in proportion to its share capital. [19]

      The effect of a bonus issue on the issuer’s market capitalisation is to leave it (and the value of each shareholders’ holdings) unchanged. The number of shares in issue goes up but the value of each share goes down. Normally, the dividend will be adjusted downwards to give the shares the same dividend yield as before.

      For some markets (including the UK) the effect of reducing the price of individual shares can be advantageous as a very high price for shares is thought to put off investors.

      In the US a scrip or bonus issue is known as a share split.

      Scrip (bonus) issues in practice

      A scrip issue will normally be put to the vote at a shareholder meeting before being put into effect. Practically, there is little a shareholder needs to worry about except to make a note of the date when the scrip issue is due to take place; otherwise the steep drop in the share price on the day in question may give them an unnecessary shock!

      Normally, holders of physical share certificates will be issued with new certificates showing the new number of shares they hold, but shareholders should continue to keep the old certificate because proof of their shareholding is normally based on the old and new certificates together.

      Return of capital

      A share capital reduction is another name for this exercise. The effect of a return of capital is to leave the shareholder with cash compensation for ending up with fewer shares than they started with.

      It is quite common for issuers to achieve a return of capital by replacing existing shares with a new share issue but, for example, only issuing four shares for every five held before. The shareholder will then receive a fifth ‘B’ share that can be cashed in at a future date.

      Returns of capital accounts for 2% of all corporate actions. [20 ]

      Share buyback – a non-event

      Achieving a similar result as return of capital, a share buyback occurs when an issuer buys back its own shares on the open market.

      Normally a company would require the approval of a shareholder meeting for such a move but a share buyback is not a true corporate action. This is because the transaction takes place in the stock exchange rather than through formal contact with the shareholders about an entitlement that is proportional to their shareholding.

      Both returns of capital and share buybacks have been fairly common in recent years as companies have tended to build up substantial reserves. Shareholders benefit directly from a return of capital while buybacks have an indirect benefit through the support to the share price of an issuer buying its own shares in significant amounts. Share commentators will often contrast actions like these with the launching of takeover bids, an alternative use for piles of cash.

      However, share buybacks can be used by a company as a means of a (favoured) major shareholder increasing its holding. The share buyback by Arcelor in 2006 was controversial because the Severstal stake in the company would have risen from 32% to 38% of the shares.

      Generally speaking, share buybacks usually result in a small initial increase in

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