Banks’ Dividend – Cash or Scrip?

The pandemic has resulted in the majority of the companies in the world to report less revenue and earnings. Banks’ earnings are under pressure this year especially from the fact that The Federal Reserve made the bold move of slashing interest rates to combat the impact of the pandemic to the economy. This resulted in banks’ Net Interest Margin to decline sharply and ultimately affected banks’ Net Interest Income. Furthermore, in the recent quarters, banks have been setting aside more allowances or provisions in anticipation of increasing non performing loans. 

Many banks around the world had decided to scrap or reduce dividends for the year or so and it is a matter of time for the banks in Singapore to do the same. In an interview with CNBC, DBS CEO mentioned that the bank is confident that if the potential costs are around $3 – $5 billion, DBS does not need to cut dividends, as its capital base is robust enough. However, if DBS voluntarily cut its dividends without any regulations pressure, it would mean that the outlook is grimmer than what it had originally anticipated. If the regulators take a view on dividend cuts it does not necessarily mean that the outlook is grimmer. 

MAS Announcement

Prior to the release of banks’ earnings, MAS announced that locally-incorporated banks headquartered in Singapore have to cap their total dividends per share (DPS) for FY2020 at 60% of FY2019’s DPS, and offer shareholders the option of receiving the dividends to be paid in scrip in lieu of cash. Scrip Dividend provides shareholders an option of receiving their dividends in the form of shares instead of cash. The default dividend payment is cash. 

MAS emphasised the fact that local banks’ capital positions are strong but capping the dividend is a pre-emptive measure to bolster its resilience and capacity to support lending the business and individuals through an uncertain period. 

Furthermore, MAS also reiterated that through its stress tests, local banks have remained resilient even under adverse conditions consistent with a serious and prolonged public health crisis. As global economies are not yet showing sustained signs of recovery, it would be prudent for local banks to set aside a greater portion of earnings this period. Also, the cap on dividends balances the objective of capital conservation with interests of shareholders.

Banks’ Action – Scrip in lieu of Cash

Following the press release made by MAS, three locally listed banks announced changes to its dividend payout.

DBS announced that the dividend cap restricts its dividend payout to a maximum of 72 cents per share for the next four quarters starting from second-quarter 2020, or 18 cents per quarter. The maximum DPS that OCBC can declare is 31.8 cents for FY20, or 15.9 cents semi-annually. The maximum DPS that UOB can declare is 78 cents for FY20, or 39 cents semi-annually.

Issue Price of Scrip Dividends

Issue Price
DBS$21.04
OCBC$7.81
UOB$19.52

All three banks offer scrip dividends for this FY. Issue price of DBS’ scrip dividends is $21.04 based on the average last traded prices of 14 August 2020 and 17 August 2020. Issue price of UOB’s scrip dividends is $19.52, according to the average of last traded prices of 26 August 2020 and 27 August 2020. OCBC is the only bank that offers a 10% discount to the average of last traded prices. Its issuing price of scrip dividends is $7.81, a 10% discount to the average last traded prices of $8.67 between 21 August 2020 and 24 August 2020.

Fractional Entitlements

Fraction Share <= 0.5Fraction Share >= 0.5New share less than 1
DBSFraction disregarded, no cash be paidRound up to nearest whole number
OCBCRound up to the nearest whole shareRound up to the nearest whole share
UOBFraction disregarded, no cash be paidRound up to nearest whole numberPaid in cash

DBS states that when a shareholder receives fractional shares from scrip dividend, it will be rounded up to the nearest whole number if the fraction is 0.5 or more. However, if the fraction is less than 0.5 and the fraction will be disregarded. No cash will be paid on such disregarded fraction of a Share.  

OCBC will round up the fractional entitlements to the nearest whole share. 

If a shareholder is issued more than one new share, UOB will round up the fractional entitlements to the nearest whole number if the fraction is 0.5 or more, and round down to the nearest whole number if the fraction is less than 0.5 and the fraction will be disregarded. No cash will be paid on such disregarded fraction of a share. However, if a shareholder is issued less than one new share, dividends will be paid in cash,  regardless of whether he has elected to do so, to receive in scrip.. This is even if he has made a permanent election previously.

Last day of submitting Notices of Election

Participation in the Scrip Dividend scheme is optional for all the three banks. Shareholders who wish to receive the dividends in cash do not need to take any action. If they have previously made permanent elections to receive scrip dividends, they do not need to take any action provided that they want to continue to receive in scrip. Shareholders who wish to opt out of permanent elections should submit the Notice of Cancellation by the stated deadline to CDP or Share Registration of respective banks.

Last Day to submit Notices of Election and Notice of Cancellation
DBS11 September 2020 (Friday)
OCBC22 September 2020 (Tuesday)
UOB21 September 2020 (Monday)

Advantages and Disadvantages of Scrip Dividend

Advantages

There are advantages and disadvantages of choosing Scrip Dividend. There is no one size fits all solution to everyone as it really depends on how many shares a person has with the bank. 

One of the advantages of choosing Scrip Dividend is that the issue price for scrip is usually at a significant discount to the market price, so as to entice investors to opt for Scrip Dividend. OCBC has been offering a Scrip Dividend Scheme since 2008 and the take up rate is as high as 76% for some years. This is because its issue price is set at 10% discount to the average last traded price. Furthermore, OCBC is the only bank that offers such a discount this time round. As the other two banks did not offer any discounts for its scrip dividend, it is less attractive to opt for it as the issue price for DBS’ scrip shares is higher than the last traded price of $20.76 for DBS while UOB’s scrip shares issue price is slightly lower than the last traded price of $19.66 . 

Next, with Scrip Dividend, where shareholders will receive additional shares instead of cash, in the long run, shareholders’ shares will grow, leading to compounding in the long run. Shareholders get to put their money in the form of dividends to work, instead of receiving cash, where it is impossible to buy less than one lot in Singapore except from the odd lot market, thus preventing cash from idling in the bank account.

Lastly, with Scrip Dividend, shareholders do not need to pay for any commission to acquire more shares. Depending on the number of shares held, companies will round up to the nearest whole number if the fraction is 0.5 or more. This would mean that a shareholder will receive more in value in this case. For investors with huge shareholding and who will receive scrip in board lots, it is especially attractive provided that the scrip is issued at a significant discount to the market price. This means that the shareholders have the potential to lower its average price without any cost. However, for the case of DBS and UOB, instead of saving on commission, it might be better off getting the shares from the market as the issue price is slightly higher than the current market price.

Disadvantages

There’s always two sides to a coin, even though scrip dividend might sound attractive, there are some cons to it. 

Share dilution is unavoidable when scrip dividend scheme is introduced, it is how significant the dilution is based on the take up rate that should be in question. As mentioned earlier,  OCBC has been offering a Scrip Dividend Scheme since 2008 and the take up rate is as high as 76% for some years. This resulted in its outstanding shares to increase by about 1-2% each time. Therefore, share dilution is unavoidable but the effect might be insignificant even if one were to choose cash over scrip.

Having an odd lot is unavoidable and troublesome for many whose scrip dividend is less than board lot (100 shares). It is very difficult to sell away those scrip dividend as Singapore Exchange’s board lot size is 100 shares, more than the scrip dividend one will receive. It is not impossible to sell away scrip dividend but it will be cumbersome to do so. For some brokerages, odd lot or unit share cannot be placed through the Internet, one has to call to place an order in the odd lot or unit share price. Commission for trading in such market will be based on prevailing phone rate charges, which is significantly more expensive than online trading commission. With that being said, it might not be worth it for small retail investors to opt for scrip dividend as the commission from selling can be about half of the value of the scrip.

Closing Thoughts – Choosing between Scrip Dividend and Cash

Here comes the difficult part, it is very difficult for one, including myself, to decide whether to opt for scrip or cash.

Reasons you should opt for Scrip

For fractional entitlements, DBS and UOB states that when a shareholder receives fractional shares from scrip dividend, it will be rounded up to the nearest whole number if the fraction is 0.5 or more, while OCBC will round up the fractional entitlements to the nearest whole share. For people who believe in the power of compounding, this is an added bonus since they will receive more in value of dividend if the fraction is 0.5 or more. In addition, if one believes in power of compounding, they are less likely to sell those scrip dividends in the future as they would want to use the scrip shares to receive more scrip in the future. 

One would think that opting for scrip presents an opportunity for the value of shares from scrip dividends to increase in the future, since banks’ shares had been beaten down badly this year, thus having paper profit. However, take note of the commission charges from recognising the paper profit from opting scrip as after taking into account the commission, it might erase the paper profit (especially for 1 or 2 scrip shares) completely as the phone commission charges is higher than online commission charges.  

Reasons you should opt for Cash

I would think that opting for scrip is a double edge sword, as it really depends on the belief of the individual on the share price movement in the future. However, there is also a chance where the value of the shares may decrease in the future, thus having paper loss from it. 

I believe that receiving more in value of dividend when scrip is rounded up to the nearest whole number should not be the main reason for choosing scrip, especially for those who prefer to receive dividends in cash and are blindsided by the benefits of fractional entitlements. If one prefers to receive dividends cash in the first place, one would have the intention to sell the scrip on the odd lot market, thus incurring unnecessary commission charges that could cost more than half of the value of the scrip dividend. This defeats the purpose of opting for scrip since one could receive more in cash after selling.

What I will choose

Small ShareholdingLarge Shareholding
DBSCashCash or Scrip
OCBCCashScrip
UOBCashCash or Scrip

If I were a large OCBC shareholder, I will opt for scrip instead of cash. The main reason for choosing this option will be the fact that the issue price is at a 10% discount to market price. Odd lot is unavoidable, do calculate how many odd lot will receive and consider whether is it attractive to opt for scrip after taking into account the commission charges for selling odd lots.

If I were a small OCBC shareholder, though a 10% discount to market price might sound attractive, I have to take into account the commission charges for selling odd lots. If that is the case, I will opt to receive cash and allocate it for investment. 

If I were a small DBS or UOB shareholder, I will opt to receive cash and allocate it for investment. This is because there is no incentive like the one offered by OCBC for me to opt for scrip. As a small DBS shareholder, with the fractional entitlement, my scrip dividend will be rounded up to the nearest whole number and even if the value of scrip were to increase, this will be offset by the high commission charges if I were to sell scrip in the future. 

If I were a large DBS or UOB shareholder, I might not consider taking up scrip as once again it does not offer a 10% discount to last traded price, like the one offered by OCBC. At the time of writing, the issue price is higher than the last traded price, making it less attractive to opt for it. As mentioned earlier, one could use the cash from dividend to buy at a cheaper price than the scrip price if the market becomes unfavourable in the future. If one were to opt for scrip, odd lot will be unavoidable. Calculate how many odd lot one will receive and whether is it still attractive to choose this option after taking into account the commission charges for selling odd lots.

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