Mar 26 2008
Macquarie International Infrastructure Fund Scrip Dividend Scheme
Macquarie International Infrastructure Fund (MIIF) had previously announced that they have a scrip dividend scheme as an alternative method for investors to receive their dividends.
What this means is that an investor can opt to receive shares instead of cash as dividends. The amount of shares you receive will be based on your entitled dividend amount divided by the issue price.
The issue price is fixed at a 5% discount to the mean of the closing price from 14th March 08 to 4th April 08.
You can decide whether or not to opt for the scheme after the issue price has been fixed and you can also choose whether this decision is a one time thing or applies to all future dividends as well.
What are the pros and cons of this scrip dividend scheme? Let’s list out some of common thinking before you decide whether to opt for it. Note that what is discussed will be applicable not just to Macquaire International Infrastructure Fund, but other companies as well.
- It allows an existing investor to reinvest into the company without paying commissions and at a discount to the market price.
- You end up with odd lots.
- There is share dilution and earnings per share will drop.
Now, let us go into a more detailed analysis to establish whether the above makes sense. For simplicity sake, the terms earnings and dividends will be used interchangeably (assume 100% of earnings is declared as dividends).
Consider this:
Stock A has 10,000 shares in circulation and the net tangible assets of the company is $10,000. The market price of each share is $1. Thus, the share is trading at NTA price.
The company makes $500 in profits. This income is generated by the $10,000 worth of assets or restated, $1 of asset can produce $0.05 in earnings.
The issue price of the scrip dividend is $1 per share.
You own 1000 shares of the company. Earnings attributable to you is $50.
Scenario 1 - Everyone takes up the scrip dividend
Total shares in issue is now 10500 shares and you own 1050 shares of the company. Company assets have gone up to $10500.
What happens during the next period?
Case A - $500 is not put to use therefore earnings remain the same.
Earnings per share (for the next period) = 500/10500 = $0.0476/share
Your share of the earnings = 0.0476 x 1050 = $50
NTA of the company = 10500/10500 = $1
What has happened? You have sacrificed $50 cash dividend and when the next period comes, the dividends you receive is still the same even though the number of shares you own has increased.
Actually, you have not really lost the $50 you didn’t pocket as it is reflected in the total NTA in the shares you hold ($1x 1050).
Case B - Company uses the $500 to purchase an asset which can produce an income of 5%.
New earnings = 10500 x 0.05 = $525
Earnings per share (for the next period) = 525/10500 = $0.05/share
Your share of the earnings = 0.05 x 1050 = $52.50
NTA of the company = 10500/10500 = $1
Your share of the earnings has gone up. Nice! As the same for 1A, your share of the assets is 1 x 1050.
Scenario 2 - Only you take up the scrip dividend
Total shares in issue is now 10050 shares and you own 1050 shares of the company. Company assets have gone up to $10050. What happens during the next period?
Case A - $50 is not put to use therefore earnings remain the same.
Earnings per share (for the next period) = 500/10050 = $0.04975/share
Your share of the earnings = 0.04975 x 1050 = $52.24
NTA of the company = 10050/10050 = $1
This time round, your dividends have gone up even though earnings for the entire company has remained the same. This happens because you now own a greater percentage in the company.
Someone else who had not taken scrip would actually receive less dividends.
Case B - Company uses the $50 to purchase an asset which can produce an income of 5%.
New earnings = 10050 x 0.05 = $502.50
Earnings per share (for the next period) = 502.50/10050 = $0.05/share
Your share of the earnings = 0.05 x 1050 = $52.50
NTA of the company = 10050/10050 = $1
Earnings/share has gone up. Notice your share of the earnings is the same amount as 1B.
Someone else who had not taken scrip would receive the same dividends as before.
Let’s sum this all up.
Scenario 1A is the worst case to take a scrip dividend.
In scenario 2A, your earnings compound by 4.5% due to the actions of other shareholders even though company does nothing with your new capital.
In scenario 1B and 2B, your earnings compound at 5%. This is the result of the company putting your capital to good use.
Of course, there are cases where the manager uses the excess capital to generate earnings from 0-10%. You can try repeating the calculations here. 
The conclusion I draw is this: If the manager can’t put our capital to good use, we would be better off taking the cash dividend and reinvesting it somewhere else. If we believe in him and are satisfied with the earnings he can achieve with our capital, the scrip dividend is worth considering.
What about the issue of odd lots? If you investment horizon is long, it shouldn’t really matter as your number of shares should compound sufficiently to allow them to sell them (if you want to do so). You can treat the few odd lots left behind as dividend play.
But I’m not done yet. Because in the examples I have given, the market price is equal to the NTA of the share. What happens if they are different? That is another important factor to determine whether or not I will take a scrip dividend. This will be explored in another article.
