Page 192 - F3 Integrated Workbook STUDENT 2019

Chapter 8

Scrip dividends and share repurchase

4.1 Scrip dividends

Shareholders are offered bonus shares free of charge as an alternative
to a cash dividend.

Reasons for a scrip dividend

 If the company wishes to retain cash in the business.

 If shareholders wish to reinvest dividends in the company but avoid brokerage
costs of buying shares.

 If there are tax advantages of receiving shares rather than cash (in some
jurisdictions).

Impact of a scrip dividend

 If all shareholders opt for bonus shares, the scrip issue has the effect of
capitalising reserves. Reserves reduce and share capital increases.

N.B. The disadvantage to shareholders is that, unlike reserves, share capital is
non-distributable in the future.

 Both share price and earnings per share will fall due to the greater number of
shares in issue – although the overall value of each shareholder’s shares and
share in future earnings theoretically remain unchanged.

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