What Is Economic Scrip Dividend?
An economic scrip dividend is a type of dividend payment where a company distributes additional shares to its shareholders instead of a cash payout. This approach falls under the broader category of corporate finance and dividend policy, allowing a company to retain cash within its operations for various purposes, such as reinvestment or debt management, while still rewarding its shareholders. Companies that offer scrip dividends often provide shareholders with the choice between receiving cash or new shares.33
History and Origin
The concept of scrip dividends, while perhaps less common than traditional cash dividends, has been employed by companies for a considerable period. Companies may opt for scrip dividends to manage liquidity, especially during periods of economic uncertainty or when significant capital expenditure is planned. For instance, during the COVID-19 pandemic, some companies temporarily reintroduced scrip dividends to conserve cash.32 Historically, major European banks, including Barclays and HSBC, temporarily suspended scrip options in 2020 due to regulatory pressures, although they later resumed cash payments.31 Similarly, Shell Global operated a scrip dividend program from 2015 but cancelled it in 2017, returning to solely cash dividends.30
Key Takeaways
- An economic scrip dividend provides shareholders with additional shares of the company instead of a cash payment.
- Companies often use scrip dividends to preserve cash for reinvestment, debt reduction, or other operational needs.
- Shareholders may benefit from increasing their ownership stake without incurring brokerage fees.
- The tax implications of scrip dividends can vary by jurisdiction and may be treated differently from cash dividends for income and capital gains tax purposes.29
- While scrip dividends can dilute earnings per share in the short term, they can support long-term growth if the retained capital is invested effectively.
Formula and Calculation
The calculation of an economic scrip dividend involves determining the number of new shares a shareholder will receive based on the cash dividend equivalent and the share's reference price.
The general approach is:
Where:
- Cash Dividend per Share: The cash amount per share that would have been paid as a traditional dividend.
- Number of Existing Shares: The total shares held by the shareholder.
- Reference Price per Share: The price at which the new shares are issued, often based on the market price around the dividend declaration date, and sometimes with a discount.28
For example, if a company declares a cash dividend of $1.50 per share and the reference price for the scrip shares is $40, a shareholder owning 200 shares would be entitled to:
Since fractional shares are typically not issued, the shareholder would receive 7 additional shares, with any residual cash amount potentially carried forward or paid out.26, 27
Interpreting the Economic Scrip Dividend
Interpreting an economic scrip dividend requires understanding both the company's financial strategy and the shareholder's investment goals. From a company's perspective, offering a scrip dividend indicates a desire to retain cash, which can be a strategic move for funding growth initiatives, reducing debt, or strengthening the balance sheet. This can be particularly relevant for companies in high-growth industries or those undergoing significant capital expenditures.25
For shareholders, opting for a scrip dividend allows them to increase their ownership stake in the company without making additional cash investments. This can align with a long-term investment strategy focused on compounding returns through reinvestment rather than immediate income. However, shareholders should also consider the potential for earnings per share dilution, as the issuance of new shares increases the total number of outstanding shares.
Hypothetical Example
Consider "InnovateTech Inc.," a rapidly expanding technology company. InnovateTech has had a profitable year, but its management team plans a substantial investment in a new research and development facility. To conserve cash for this project, the board announces an economic scrip dividend instead of its usual cash dividend.
InnovateTech declares a dividend equivalent to $0.75 per share. The average market price of InnovateTech shares around the declaration date is $50. A shareholder, Sarah, owns 1,000 shares of InnovateTech.
If Sarah opts for the scrip dividend, her calculation would be:
Sarah would receive 15 additional shares of InnovateTech, increasing her total holding to 1,015 shares. This allows InnovateTech to retain $750 in cash that would have otherwise been paid to Sarah, which can then be allocated to the new facility. For Sarah, her shareholding increases, potentially leading to greater future returns if InnovateTech's investments are successful and contribute to higher share prices.
Practical Applications
Economic scrip dividends find practical application in various financial contexts, primarily serving as a tool for corporate liquidity management and shareholder flexibility. Companies, particularly those in the utilities and real estate sectors, have historically utilized scrip dividends to retain capital for significant investments or to navigate uncertain economic conditions.24 For example, BP and Royal Dutch Shell have offered scrip dividend programs as part of their strategies to conserve cash and reinvest in their businesses.23
From an investor's standpoint, scrip dividends can be part of a dividend reinvestment plan strategy, allowing shareholders to automatically increase their equity exposure in a company. This is especially appealing to growth-oriented investors who prioritize capital appreciation over immediate income. Regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK, acknowledge scrip dividends as a form of distribution that does not reduce Common Equity Tier 1 items, which are critical for a bank's financial stability.22 This regulatory perspective highlights the role of scrip dividends in maintaining a strong capital position for financial institutions.
Limitations and Criticisms
While economic scrip dividends offer benefits, they also come with limitations and criticisms. A primary concern for shareholders is the potential for share dilution. When new shares are issued, the existing ownership percentage of each shareholder decreases, and if the company's profitability does not increase proportionally, it can lead to a reduction in earnings per share. This can put downward pressure on the stock price. Some companies, such as Royal Dutch Shell, have faced criticism for diluting the value of existing shares through scrip dividend issuances.21
Another drawback relates to the tax implications, which can be complex and vary by jurisdiction. In some cases, scrip dividends are treated as income for tax purposes, similar to cash dividends, even though the shareholder has not received any cash.19, 20 This can create a tax liability without a corresponding cash flow to cover it, a situation sometimes referred to as "dry income." While tax benefits may exist in specific scenarios, such as when the capital gain from selling scrip dividends falls below the annual tax-free allowance, shareholders must carefully consider their individual tax situations.17, 18 Academic research has extensively debated the impact of dividend taxes on the cost of capital and investment, noting that differing tax treatments can significantly influence corporate financial decisions.15, 16
Furthermore, the diminishing popularity of scrip dividends in recent years, particularly in Europe, suggests that companies are increasingly favoring cash distributions as market conditions improve and balance sheets strengthen.14 This trend indicates that the strategic advantages of scrip dividends, such as cash conservation, may be less compelling for some companies in more stable economic environments. Investors should evaluate the underlying reasons a company opts for an economic scrip dividend and its potential long-term impact on shareholder value and overall return on investment.
Economic Scrip Dividend vs. Stock Dividend
While often used interchangeably in some contexts, an economic scrip dividend and a traditional stock dividend have subtle but important distinctions.
| Feature | Economic Scrip Dividend | Stock Dividend |
|---|---|---|
| Shareholder Choice | Often provides an option between cash or shares.13 | Typically, shareholders receive only additional shares; no cash option is given.12 |
| Purpose for Company | Primarily for cash retention and liquidity management.11 | Capitalizes retained earnings, but generally less about immediate cash conservation. |
| Issuance Source | Can involve newly issued shares.10 | Usually involves newly issued shares from retained earnings. |
| Tax Treatment (Varies) | May be treated as income equivalent to cash dividend.8, 9 | Often treated as a non-taxable event upon receipt, with cost basis adjustment for capital gains later. |
The key differentiator lies in the optionality for the shareholder. An economic scrip dividend typically presents a choice, allowing shareholders to decide whether they prefer cash or additional equity in the company.7 A regular stock dividend, conversely, is usually a mandatory distribution of shares without a cash alternative.
FAQs
Why do companies offer economic scrip dividends?
Companies offer economic scrip dividends primarily to conserve cash for reinvestment in the business, debt reduction, or other operational needs, while still providing a return to shareholders.6 This helps maintain a strong cash flow position.
Are economic scrip dividends taxable?
The tax treatment of economic scrip dividends varies by jurisdiction. In many regions, they are treated as taxable income equivalent to a cash dividend, even though no cash is received.4, 5 Shareholders should consult a tax advisor regarding their specific situation.
How do economic scrip dividends affect a company's stock price?
Issuing new shares through an economic scrip dividend can lead to a slight dilution of existing shares, which might put short-term downward pressure on the stock price. However, if the retained cash is used for profitable investments, it could lead to long-term share price appreciation.
Can I choose to receive cash instead of scrip shares?
Many companies that offer economic scrip dividends provide shareholders with the option to choose between receiving new shares or a cash payment.3 Shareholders usually need to elect this option by a specified deadline.2
Is an economic scrip dividend the same as a dividend reinvestment plan (DRIP)?
No, they are similar but not the same. An economic scrip dividend is a dividend paid in shares by the company itself as an alternative to cash. A dividend reinvestment plan (DRIP) allows shareholders to use their cash dividends to purchase additional shares, often without brokerage fees, through a program administered by the company or a third party.1