Definition
A Scrip Dividend is a form of dividend payment made by a company to its shareholders in the form of additional shares, instead of cash. This typically occurs when a company wants to reward its investors but doesn’t have the liquid cash to do so or wants to reinvest its earnings back into the business. The amount of shares received is proportionate to the shares already held by the shareholder.
Key Takeaways
- Scrip Dividend is a type of dividend that is issued in the form of additional shares or scrips instead of cash payouts to shareholders. It allows the shareholders to increase their investment without investing any additional cash.
- Companies often opt for scrip dividends when they are short of liquid cash or want to preserve their capital for business expansion and expenditures. Although it might not increase the immediate liquidity of a shareholder, it might benefit them in the long run with an increased number of shares.
- This type of dividend could change the shareholding structure of the company. As more shares are issued, it might dilute the existing shareholders’ ownership. However, it can also lead to capital gains if the company’s shares appreciate in value over time.
Importance
Scrip Dividend is an important finance term as it provides an alternative way for companies to distribute profits to their shareholders, especially in situations where the company may wish to retain cash for further investments or debt repayments.
Instead of cash dividends, shareholders are issued additional shares in proportion to their existing holdings, allowing their investment to grow without immediate taxation.
This benefits the shareholders as they have an increased stake in the company, while benefiting the company itself by maintaining liquidity and potentially increasing market interest in their stock.
Consequently, understanding the concept of scrip dividends is essential for both companies and investors when considering strategies for capital growth and tax optimization.
Explanation
Scrip Dividend serves a crucial purpose in the financial structuring of a corporation, it pertains to the strategy of managing and conserving cash flow, especially in periods or situations where the liquidity might be tight. When a corporation is not willing or able to pay dividends in cash, due to cash conservation or cash flow challenges, it can opt to issue scrip dividends.
This dividend arrangement aids in maintaining shareholder satisfaction by still providing dividends but in the form of additional shares or fractions of a share, rather than cash disbursement. The use of scrip dividends is particularly beneficial for shareholders who desire a long-term investment strategy focused on capital growth.
Venture capitalists and investors seeking organic portfolio growth might prefer this kind of dividend, since it automatically reinvests their profits back into the company. It is thus a strategy that encourages long-term financing and fosters relationship between the shareholders and the corporation.
It simultaneously provides an advantage to the corporation as it can reinvest the retained earnings back into their businesses instead of paying it out to shareholders. Thus, scrip dividend serves as a win-win for both the corporation and the shareholders.
Examples of Scrip Dividend
A Scrip Dividend is a type of dividend that is paid by issuers to shareholders as additional shares of stock rather than cash. Here are a few real-world examples:
BP Script Dividend: In response to the Deepwater Horizon Oil Spill disaster in 2010, oil company BP announced they were suspending their cash dividend payments in order to cover the costs of the clean up. The company opted instead to issue a Scrip Dividend, which gives shareholders the option to take additional shares in the company instead of cash dividends. This allowed BP to maintain capital while continuing dividend payments.
Unilever PLC Scrip Dividend: In 2016, Unilever PLC activated a Scrip Dividend alternative allowing shareholders, should they choose, to receive additional company shares rather than cash for their dividend payment. This option keeps cash within the company, which can provide a measure of financial flexibility in certain circumstances.
BASF SE Scrip Dividend: One more example, in 2015, German chemical company BASF offered a scrip dividend option to their shareholders. This allowed BASF to retain more of its capital, while still providing its shareholders with the benefit of a dividend. The shareholders then had the choice between taking their dividend in cash or reinvesting it in the company via the scrip dividend.
FAQ: Scrip Dividend
What is a Scrip Dividend?
A Scrip Dividend refers to a dividend payment made in the form of additional shares of the issuer, rather than paying in cash. Shareholders can then sell these shares to others on the market, providing liquidity.
Who can receive a Scrip Dividend?
Any shareholder of a company offering a Scrip Dividend can receive this form of payment. However, some shareholders may choose the option for a cash dividend if it’s available.
What are the advantages of a Scrip Dividend?
The two main advantages of a Scrip Dividend are that the company can retain its cash for further investment or debt repayment, and the shareholders receive additional shares which they can sell or hold, depending on their investment goals.
What are the disadvantages of a Scrip Dividend?
The main disadvantage is for shareholders who rely on receiving dividends in cash, as a Scrip Dividend is paid in shares. In addition, this can dilute the share value and it could potentially affect the share price negatively.
How is a Scrip Dividend taxed?
As with cash dividends, Scrip Dividends are generally subject to income tax. However, the tax situation can vary with jurisdiction and individual circumstances. Always consult with a tax or financial advisor for specific advice.
Related Entrepreneurship Terms
- Shareholder Equity
- Cash Dividend
- Dividend Policy
- Dividend Reinvestment
- Stock Dividends
Sources for More Information
- Investopedia: A comprehensive source for finance and investing education. The website contains a definition and detailed explanation of a Scrip Dividend.
- Corporate Finance Institute (CFI): Provides financial education and training for individuals looking to enhance their skills and knowledge. Their online resources include a glossary section which likely contains information about Scrip Dividends.
- Zacks Finance: A place to get investment research, stock information, and insights to help with financial decisions. The website has an array of financial terms explained in detail.
- The Balance: A personal finance website that provides practical tips and advice about various financial topics, which likely includes Scrip Dividends.
