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jueves, 8 de octubre de 2015

The scrip dividends

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The script dividends

The scrip dividends or stock dividends are the shares issued to reward shareholders instead of paying the traditional dividend. These shares are issued with preferential subscription rights on behalf of the shareholder.

In cases where the company remunerate the shareholders in this way, they can choose three options

  • Accept the subscription rights and add the new shares to their portfolio.
  • Sell the subscription rights to the company, at a price fixed in advance, being this option equivalent to a traditional dividend payment.
  • Sell the subscription rights on the market. As expected, in this case the price fluctuates, regardless of the nominal share value.

Why a company may prefer to pay scrip dividends?

The reason is simple. For the shareholder who accepts the new securities, it involves increasing the capital and not to touch the cash  flow.  In addition to avoiding the financial effort when paying  the cash, that liquidity can be used for other purposes. In the long term, it may be a strategy to recapitalize the company making use of the benefits, without the need for capital increases.

Moreover, we must not forget that the sale of rights have a dilutive effect for shareholders, since with the same value of the company there are more issued shares, thus, each worth less.

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