Everyone might be familiar with the paradox of the Prisoners’ Dilemma — one of the most popular concept in modern game theory in Economics. By nature, individuals tend towards acting in or protecting their own interests, by not cooperating with one another, they tend to find themselves in a worse state than they would have by cooperating.
I wrote about understanding Scrip Dividend Scheme better in a previous article. Scrip issue usually enlarges the company’s share capital base, through the creation of new shares. New shares lead to share dilution, potentially. Existing shareholders faces share dilution if they opt for cash over scrip. Shareholders who opt for scrip over cash minimally maintain or increase their stake (depending on the subscription rate) at the expenses of the earlier camp.
There is no right or wrong; the decision on choosing scrip over cash dividends or vice-versa is entirely an investment decision depending on what you plan to do with the counter in the future.
Similar to the Prisoners’ Dilemma, we can look at 4 outcomes from the Investors’ Dilemma. One of the common consideration to investors when presented with a choice of scrip versus cash — How will I lose out? What do I stand to gain from one over the other?
Scenario 1 — ALL shareholders opt for cash. No cash dividend is retained in the company. No new shares are created, and shareholders see no change in their shareholdings.
Scenario 2 — ALL shareholders opt for scrip. Cash dividend is fully retained in the company to strengthen its working capital position. New shares are created, but shareholders still maintain the same stake in their shareholdings.
Scenario 3 — A mixture of scrip and cash is chosen. Scenario 1 and 2 are highly unlikely to happen. Scenario 3 is the most common, but it usually skews towards one of the extreme Scenarios 1 or 2 depending on the attractiveness of the discount to current market price.
From an investor’s perspective, the best scenario happens when everyone chooses cash dividends, though it being a ‘detrimental’ one for the company. Everyone ‘loses’ in a sense if everyone chooses scrip — you seemed to have received value when you don’t actually have.
How much do investors who opt for cash over scrip actually lose out?
A case example — Oversea-Chinese Banking Corp (O39)
Among the 3 listed Banks in Singapore, OCBC has the greatest propensity to offer scrip dividend over the years — the 15th time since the Global Financial Crisis in 2009. With a dividend of 15.9 cents per share, it would cost the bank $700 million in cash (representing 49% of the Group’s 1H2020 net profit) for 1H 2020 dividend distribution. A participation rate of 80% by shareholdings means that OCBC could potentially preserve $140 million for working capital.
The participation rate has been healthy over the years, by consistently offering a 10% discount on the final weighted average price over a referenced time period. Between 70% – 85% of shareholdings have opt for scrip over cash and even then, the percentage of new shares created is roughly 1.5% – 2.0% each time.
| Period | Participation rate (% of shareholdings) | % increase (in ordinary shares) |
| Interim 2020 | Yet to know | Yet to know |
| Interim 2019 | 76.6 | 2.0 |
| Final 2018 | 70.5 | 1.5 |
| Interim 2018 | 76.2 | 1.5 |
| Final 2015 | 78.9 | 1.7 |
| Interim 2015 | 79.2 | 1.6 |
| Final 2014 | 82.8 | 1.6 |
| Interim 2014 | 84.1 | 1.5 |
| Final 2013 | 83.0 | 1.6 |
| Interim 2011 | 80.4 | 1.5 |
| Final 2010 | Data not avail | Data not avail |
| Interim 2010 | 80.8 | 1.5 |
| Final 2009 | Data not avail | Data not avail |
| Interim 2009 | 80.8 | 1.6 |
| Final 2008 | Data not avail | Data not avail |
To the common retail investors, yes there is share dilution experienced, but the dilution is negligible when compared to rights issue or secondary public offering. We can see from the following table the % dilution should one opt for cash over scrip when new shares are issued.
| % increase (in ordinary shares) | % dilution (in stakeholding) |
| 100 | 50.0 |
| 50 | 33.3 |
| 25 | 20.0 |
| 10 | 9.09 |
| 5 | 4.76 |
| 2 | 1.96 |
| 1.5 | 1.48 |
| 1 | 0.99 |
For this round, all 3 listed local banks have offered scrip dividends. Even if all shareholders opt for scrip over cash, the percentage of new shares increase amount to only DBS (0.8%), UOB (1.6%), OCBC (2%).
In all likelihood (referencing to previous Scrip Dividend exercises), many shareholders are going to subscribe for scrip for OCBC, unless they need cash urgently or unable to exercise for scrip (e.g. custodian account). Shareholders who do not would obviously “lose out”, though the effect is not as apocalyptic or worrying as some have put it. In fact, these same said investors could still increase their stake later on by buying more in terms of board lots (with their cash dividends and cash) instead of receiving odd lots now.
The Investors’ Dilemma, even if it holds some truth, is that investors who act alone may find themselves in a worse state than they would have by cooperating; but worse state is subjective and the effect itself is only marginally negative.
Theory of Constraints 