Definition of Scrip Dividend
The best translation of this expression from English to Spanish would be ‘dividend in shares’. In practice, it consists of making the payment of the dividend, instead of in money, in shares, for which the company must previously increase capital.
Actually, although in recent decades this type of dividend payment has been a little more in the media, it has traditionally been a fairly common operation in companies.
The script dividend logic makes sense in several cases:
– In companies with profits but with possible liquidity problems (imagine a company with long collection periods), which do not see their treasury diminished.
– In those legislations in which the sale of subscription rights has better taxation of the dividend because it offers an interesting fiscal financial return for the company.
– In companies required to maintain a certain solvency coefficient (such as banks), because distributing dividends in shares can make it easier to cover the aforementioned coefficients by converting the entire benefit into equity.
But not everything are advantages:
– There is a very liquidity-hungry shareholder profile who will prefer to collect their dividend in treasury rather than the scrip dividend.
– The costs for capital increase (necessary for the scrip dividend) can be high and require the permission of the General Shareholders’ Meeting.
– There is a risk that the main shareholders will sell the subscription right to make the investment profitable and therefore dilute their participation.
In conclusion, the scrip dividend is a way of remunerating the shareholder who can either keep the shares of the dividend (without tax effect until they are sold), or sell the preferential subscription rights in which case it will have tax effect, in many countries more beneficial than collecting a dividend.
Javier Rivas, professor of finance at EAE Business School
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