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How Does A Scrip Issue Work And What Is A Scrip Dividend?A way for a company to save money but still pay a dividend is called a scrip dividend. This takes the form of a listed company creating more shares in the firm and giving them for free to existing shareholders. This is called a scrip issue. It is a form of secondary issue and could also be well described as a way for a company to capitalise financial reserves. Generally, a firm will pay one new share for a certain and fixed number of existing shares already owned. For example, this may take the form of one new share for every 20 held. This would be called a 1 for 20 scrip dividend. Therefore, if an investor owned 500 shares in a firm, and a 1 for 20 issue is paid, the investor would be entitled to 25 new shares. These are in addition to the current holding. This is essentially a bookkeeping exercise and so the ROCE (Return On Capital Employed) should not change. A scrip issue does not change the value of a company and so an investors holding will be the same value before and after. The ex-scrip price is calculated as: Ordinary shares held x Original share price divided by Total number of new shares held It is worth noting that should an investor sell the newly issued shares, the proportionate holding in the company is reduced. Therefore, if we follow our example still further and the current price per share is 10.50... 500 x 10.50 divided by 525 = 10.00 (Ex-scrip price) The investor could sell the new scrip shares and receive: 10.00 x 25 = 250.00 This is a rather ingenious way of offering a reward to shareholders without the need to actually release money. For some investors, it will offer a tax efficient way of receiving benefits from a holding. Often, an investor may choose to sell the scrip issue, making a capital gain rather than receiving an income. If the investor has not exceeded his or her annual capital gains allowance, the sale will be tax free. Obviously, it goes without saying, that this depends upon the situation of the individual. However, since in the UK the majority of investors do not pay capital gains taxes, this is a more tax efficient route of releasing funds to investors. For more information about dividends:
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