Scrip Dividend

A scrip dividend is a dividend that a company offers to pay in the form of newly issued shares in place of cash, usually at the shareholder's choice. A holder who elects for scrip receives additional shares worth roughly the cash amount given up; a holder who does nothing normally receives cash. Companies offer it to keep cash in the business while still declaring a dividend, and shareholders may take it to increase their holding without paying dealing costs.

The term is used mainly in the United Kingdom, Ireland, continental Europe, Australia, Hong Kong and Singapore. It differs from a stock dividend or bonus issue, where every holder receives shares and no cash alternative exists, and from a dividend reinvestment plan, where the company pays cash and an agent uses it to buy existing shares in the market.

The company declares a cash dividend per share and, alongside it, a scrip alternative. It then sets a reference price for the new shares, typically the average market price over several trading days beginning on the ex-dividend date, sometimes less a small discount. The number of new shares for each electing holder is the cash dividend forgone divided by the reference price.

For example, a company declares a dividend of 0.20 per share and sets a reference price of 8.00. A holder of 1,000 shares is entitled to 200 in cash. Electing for scrip gives 200 ÷ 8.00 = 25 new shares. Where the result is not a whole number, the fractional entitlement is dealt with as the terms state: the cash value of the fraction may be paid out, carried forward to the next dividend or given up. Many companies allow holders to lodge a standing mandate so that scrip is taken automatically for every future dividend.

No cash leaves the company for shares taken as scrip. The new shares are generally paid up out of distributable profits or, where the law allows, out of reserves: the nominal value is credited to share capital and any excess of the reference price over nominal value to the share premium account, with a matching reduction in retained earnings. The details depend on the company's constitution and local company law.

Because new shares are issued without new money coming in, a scrip dividend dilutes holders who take cash. Their percentage of the company falls slightly each time, and earnings per share are spread over a larger number of shares. Some companies offset this by buying back shares. Shareholders usually have to authorise the directors to offer scrip, often for a period of several years.

Tax treatment varies by country and is a main factor in the choice. In the United Kingdom, an individual who takes scrip is generally taxed as if a cash dividend of the same amount had been received, so the election does not avoid income tax. In some other countries, shares issued out of certain reserves are not taxed as income when received and instead lower the average cost of the holding. For cross-border investors, the application of dividend withholding tax to the share option differs from market to market, and custodians apply the rate advised for each event.

Operationally, a scrip dividend is a mandatory with options corporate action: something will happen to every holder, but the holder can choose the form. In ISO corporate action messages it is announced with the event type for a dividend option, with cash normally marked as the default option. Custodians notify clients, collect each corporate action election, and pass totals to the depository or registrar by the market election deadline.

In several European markets the event is run in two stages: holders are first credited with interim rights, one per share, and then choose whether to convert the rights into new shares or receive cash for them. Entitlements are based on positions at the record date. The cash leg follows ordinary cash dividend processing, while the share leg is settled by crediting new shares on or shortly after the payment date. Because the reference price is often fixed only after the event is first announced, intermediaries must update the terms and recalculate entitlements during the election period.

For the company, scrip preserves cash and can support regulatory capital, which is why banks and insurers used it widely after the 2008 financial crisis. For shareholders it offers a cheap way to add to a holding. Critics argue that it obscures the true cash cost of the dividend, that the stream of small share issues is dilutive and administratively costly, and that it complicates investors' tax records. Several large UK companies have replaced scrip with dividend reinvestment plans for these reasons.