Macquarie International Infrastructure: Scrip Dividend illustration

This is a wrong example.

When company ABC declare dividend. Whether it is cash dividend or scrip dividend, it must declare out of retained earning which already inside the shareholder equity, also call NBV(not NTA, net tangible asset because shareholders equity make up of both tangible and intangible asset.) If cash dividend, NBV reduce according after that, if scrip dividend, NBV remain intact assuming all scrips are taken up since no money is being paid out.

So 1st point. NBV does not depend on the share price UNLESS company ABC raise new capital from the investor thru issuing of new share.

2nd point. Just like right issue, what is the price of scrip dividend doesn’t matter. End of the day it is the total number of shares outstanding that determine NBV per share.

And if all shareholders take up scrip dividend, NBV will drop according in the same % to the increase in number of share.

MIIF declare scrip dividend? That is interesting. While I never look in MIIF, what I know is that MIIF is structure as a dividend paying vehicle. So NOT paying cash dividend put MIIF in the question of how and why MIIF unable to pay cash dividend. Even utility share pay cash dividend. If they are hoarding cash for growth den that put another question of why MIIF is not raising capital for acquisition as long as it increase yield?

Lastly lets not forget that Macquarie is the champ of financial engineering.

DNHH, i think u have a gripe against not paying out cash. If it is taken as a DRIP scheme, then its all good for the benefit of the investor.

I will not question if this action is a precursor of a scenario where they cannot pay dividend.

If you have read this article, you will have know that paying through debts is also a big risk.

I made a mistake on using yield and book value to determine whether it is undervalue or fully valued. It is the ability to pay yield from cashflow and the intrinsic value of the underlying assets that is important.

Would really have to monitor their actions on the acquisitions and divestments. I have a bigger problem with this then scrip dividends.

Of course I am against(against any company) not paying cash dividends because if a promise(not obligation) is made in the 1st place den they are breaking their promise.

A scrip dividends is NOT a dividend even if it is DRIP(Yup DRIP because in simple form : a company with DRIP = a company that does not pay dividend). End of the day, assume all take scrip, every shareholder percentage of ownership remain the same which also mean the company did not pay and shareholder did not receive dividends for the year. It doesn’t matter how beautiful the name is call, paying scrip mean either hoarding cash for growth or unable to pay dividend.

Whether it is MIIF or any other company, the risk of buying assets thru debts is the same. It all depend on how strong is the company.

As you said “It is the ability to PAY YIELD FROM CASHFLOW and intrinsic value of the underlying assets that is important.”

Hi Donmihaihai,

In this case, they provide the scrip dividend scheme as an option. So investors can choose which want they want to opt for. If they go for cash, the end result to the investor won’t be any different.

Thanks for pointing out the mistake. I’m no accountant and will have to digest your comments further…

Taking scrip is like telling the company,

“Hey I don’t want my cash dividend for this round. Please take my money back to reinvest.”

Is this bad for the investor? Depends on the company does with the money.

Hi Donmihaihai,

“2nd point. Just like right issue, what is the price of scrip dividend doesn’t matter. End of the day it is the total number of shares outstanding that determine NBV per share.”

Won’t the price of the scrip determine the total number of shares outstanding?

Hi Donmihaihai,

I think you might have missed out my earlier example:

http://www.lioninvestor.com/macquarie-international-infrastructure-fund-scrip-dividend-scheme/

I’m actually using earnings and dividends interchangably (as a simplied example) just to illustrate the difference between taking or not taking scrip.

The portion posted by Drizzt might not have brought this point across properly.

All the links I can think of.

The qualitative side of scrip dividends: I won’t touch on it as any shareholder will know their company better than me.

Quantitative and valuation(there is a big different between getting cash or scrip) side.
All assume scrip are fully taken up.

1st : What increase and decrease NBV.
Raise Capital, earning, gain in sale of assets increase NBV.
Dividend payout, losses, losses in sale of assets, writeoff decrease NBV.
Changes in No. of outstanding shares changes NBV per share according but will not touch NBV.
Since Taking scrip dividends(discount, at or premium of NBV) does not belong to any of the abovementioned activity except changes in no of shares, NBV does not change.

Company : ABC
Net profit : $1,000
No of share : 1,000
Share price : $10
No of shareholder and ownership : 10, each 10%
cash or scrip dividend per share: $1
All taken up : total no of share = 1,100. EPS = $0.91. Each shareholder own 110 share now compare to 100 before but their ownership unchange at 10%
The adjustment of NBV per share the same as EPS.
So what it say? It says paying scrip(fully taken up) = not paying dividend despite increase in no. of share because ownership remain unchange.

Valuation on taking or not taking scrip.
Share price at :$10
1 shareholder take cash, 9 take scrip.
total no of share post: 1,090.
Cash taken shareholder ownership drop from 10% to 9.17%.
share price at : $5
1 shareholder take cash, 9 take scrip.
total no of share post : 1,180
cash taken shareholder ownership drop from 10% to 8.47%
share price at : $20
1 shareholder take cash, 9 take scrip
total no of share post : 1,045
cash taken shareholder ownership drop from 10% to
9.57%
What does it say? There is a big different between taking cash and scrip according to the valuation of share price. Taking cash at low valuation is super diluative. In fact, shareholders are using dividend to purchase additional share from company which also mean assessing the share price valuation is required. If Company share price is trading at 20X earning, shareholders are purchasing additional share at 20X earning.
In additional, if ABC share is trading at high valuation, the correct action is to raise capital by issuing new shares for growth(think how REIT growth with acquisition in last few years). Which also mean that if the company give scrip, shareholders have no choice(except sell)but go for the scrip or get diluted big time.So in theory shareholders have an option to take cash or scrip but in fact(most of the time) there is only one option which is take scrip.

Taking cash and scrip is not just about making choice for this year, it is also about ownership of the company and long term.

Hi DMHH,

Thanks for your explanation.

I believe my example and yours are trying to say the same thing. I was actually giving the numbers for the next period, which is why NBV will be affected.

Whether I take scrip or not will change the company’s NBV because

1) If I take scrip, company doesn’t need to pay out the cash.
2) If I don’t take scrip, company has to pay out cash instead.

“In additional, if ABC share is trading at high valuation, the correct action is to raise capital by issuing new shares for growth(think how REIT growth with acquisition in last few years).”

It’s actually the same coz you will end up with the dilution.

Assuming share is currently overvalued:

1) Company pays out $1 million in dividends.
Then it raises capital of $1 million via private placement.

2) Company pays out $1 million in dividends. Then it raises capital of $1 million by using a rights issue from existing shareholders.

3) Company does not pay out $1 million in dividends.

4) Company does not payout $1 million in dividends and gives scrip dividends instead.

2,3 and 4 has the same effect on existing shareholders.

For 1, existing (minority) shareholders do not even get to choose and end up with the same dilution.

Anyway, dilution might not be too big an issue if the earnings grow to make up for it. To me, the look-through earnings is the more important than the percentage holdings.

Raising equity, if done for the right purpose and at the right time, is generally good for shareholders.

You are RIGHT!!!!!
We are saying the same thing. Need to read the complete article to understand. My FAULT.

My 1st impression was because taking scrip at discount to NBV increase NBV which is of course not true.

But taking scrip(discount or not) does not increase NBV. In fact, NBV should be drop by the amount of cash taken out for those taking cash dividend. Not the other way.

“It’s actually the same coz you will end up with the dilution.”
Yes, same dilution but it is the new shareholders who pay a premium for the share not existing shareholders. If there is cash dividend in the 1st place, existing shareholders take cash, den get diluted by new shareholders who pay a premium for new shares and join in the ride together with the new shareholder with their new capital.
There is a diff between who is coming out with the monies.

Just like your 1, 2 ,3 &4. Even with same dilution due to same valuation, 1 is better than 2 & 4 because existing shareholders pocket the cash and new shareholders pay for the overvalued new issue.

Hi DMHH,

Thanks for verifying that we are on the same track.

Personally, I like the scrip dividend thing because if the price is at a premium, I can always turn it down and let the other shareholders absorb it.

From my point of view, that will still be like case 1.