Page 101 - AFM Integrated Workbook STUDENT S18-J19

The dividend decision

Scrip dividends and share buybacks

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.

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.

NB: 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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