22 July 2013

Dividend Reinvestment Scheme

I remembered that HSBC is giving its shareholders an option to reinvest their dividends in shares at cheaper price. Not only itself, Maybank, Noble and some other listed companies also do the same things. So what's the purpose for management to offer the scheme to its shareholders and what should shareholders response to this?

Management perspective:

1. Reduce the cash out flow due to cash dividends paid to shareholders. Not only that, some companies are required to pay for taxes on dividends before distributing to clients. So it also may increase total cash flow over all. 

2. Increase the loyalty among shareholders. It can be a sweetener for long term investors who prefer to keep the dividends in shares so that they can enjoy long term capital appreciation from the share price. 

3. The management can keep more cash for further investment by investing in capital expenditure. So the potential investing cash flow can be higher. 

4. A better corporate finance structure by improving liquidity ratio. This can be done by keeping more cash & equivalent assets. In may also stands as a covenant to keep a better credit ratings. 

Shareholder perspective:

1. A chance to have more shares without incurring transaction costs, as they can avoid additional commission charges when purchasing additional shares trough open market. This is a good option for  investors who intend to accumulate the same counter in a long time horizon. 

2. Hassle free for investors who wish to reinvest the shares with the dividend. The shareholders can just select the reinvestment option and just wait for the shares to be credited back to their account. 

Cons:

1. Odd lots could be given to shareholders if their shareholdings are not big enough. They may go to the odd lot market to sell their shares later. Normally odd lot market offers bigger bid ask spread due to lower liquidity. 

Anyway, for those shareholders who require real cash flow, they can still reject the reinvestment scheme by opt-in normal cash dividend scheme. So I think this is a win-win solution for both shareholders and management in determining free cash flow usage. 

Welcome to leave me your comments here. 



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