Revenue Reserves and Dividends, Using Earnings to Select Stocks, Dividends

Stanbic IBTC recently notified its esteemed shareholders of the intention of its Board of Directors to pay an interim dividend of N1 per share.

According to the said notification, shareholders are given the option to choose between receiving all the dividend in cash, or in additional shares, or even a combination of cash and shares.  This is a case of optional dividend.

What is an optional dividend?

An optional dividend is a dividend where shareholders have the ability to choose between two or more forms of payment.

How optional dividend works

The way optional dividend works is pretty simple but it entails that the shareholder should make an election and communicate the election to the company or its registrar. Unlike regular cash dividend, where every shareholder on the record or ex-date automatically “gets credited” with the cash value of the dividend, optional dividends are not so automatic because they are elective and as such, the registrar or custodian will only act upon the election or decision of the shareholder.

[READ MORE: 2018 FY: Flour Mills’ shareholders unanimously endorse N4.92 billion dividend]

As noted in the release by Stanbic IBTC, elections are made by completing the requisite form and channelling same to the appropriate quarters within the allowed time.

What choice should I make?

No matter what choice you make as a shareholder (either to receive cash and/or additional shares), you should receive the exact same amount of dividend you are entitled to. The only difference is that those who elected to be paid in cash would receive cash, while those that elected to receive additional shares will receive additional shares that are worth the cash they would have received.

Dividend

In the case of Stanbic IBTC, each share is being given to those who elect to receive their dividend in shares at a price of N35.86 per share. This means that if you held 36 shares of Stanbic IBTC shares as at the record date and you opted to receive your dividend in cash, you will receive cash of N36, but if you elected to receive it in stock, you will receive one share valued at N35.86, and you will receive what is called cash in lieu of N0.14 to make up for the difference between the stock value received and the cash dividend forgone.

Fractional shares

Alternatively, the company may decide to issue fractional shares. In that case, you will not receive the cash in lieu, rather you will receive a fraction of a share to make up for the difference.

Cash Vs Stock

Now, having known that you will not be short-changed no matter what payment type you choose, the question then is, should I choose to be paid in cash or additional shares? If you are an income investor, a retiree, in need of cash and you want the peace of mind that cash offers, then choosing to be paid in cash should appeal to you. One advantage of receiving your dividend in cash is that it offers you the freedom of using the resulting cash however you want.

[READ MORE: Difference Between Interim Dividend and Final Dividend]

On the other hand, if you are a risk lover, growth or value investor, electing to receive additional shares should be your thing. An advantage of opting for additional shares is that it enables you to participate in the company’s future growth by way of increased market value per share. The disadvantage, however, is that, should you need cash, you will need to sell the shares and incur the trading commission that goes with it, an expense you would avoid if you choose to receive cash dividend.

In addition to that, depending on the market, you are not guaranteed to sell the shares at a price that will amount to the cash dividend, but it could be more if the company does well after the dividend corporate action.

Stanbic IBTC

Conclusion

If you are risk-averse, a choice of cash dividend should be good for you, but if you are a risk lover, additional shares could appeal to you, especially if you are ready to hold the shares for the long term. However, given the price trend of Stanbic IBTC Holdings company, which indicates that the share had seen more downs than ups, since around October 2018, a choice of cash dividend may be more optimal, especially, if you can invest the cash elsewhere.

Note that nothing in this article should be construed as investment advice but a mere expression of personal opinion. If you need professional advice on the topic or on Stanbic IBTC optional (Scrip) dividend, consult your broker.

 

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.