Stock dividend - Scrip dividend

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A stock dividend (scrip dividend) is a type of dividend that is paid to partners in the form of company titles (shares), rather than money. It is an alternative form of remuneration to shareholders (such as a flexible dividend) by the company, in order to increase its share capital.

Through the stock dividend, the investor has several options:

  • Increase your portfolio by acquiring new shares and exchanging them for the rights it generates.
  • Sell ​​the rights on the market.
  • Receive a guaranteed minimum payment for the rights indicated in the account, in case you are not interested in the two previous options. This minimum payment works like a payment of a dividend.

Generally, the purpose of this operation is for investors to take advantage of the increase in the number of shares they have in their portfolio. All this, so that the company does not have to release capital and, with it, can incur with that money in new investments.

While it is true that this is the original option, companies also offer more alternatives to the investor to capture their attention. Furthermore, in many cases they function as disguised capital increases.

The difference between the dividend in shares and ordinary capital increases is that the rights that the company buys in the market do not convert them into shares, issuing a lower number of shares (it is cheaper for them).

The stock dividend has been widely used in the banking sector. In addition, it has worked as an attraction effect for many investors, since it has increased the market capitalization of companies in the short term.

Examples of stock dividend

Suppose that Banco de Santander decides to make a scrip dividend at par in a 1: 2 ratio, free (released) charged to reserves.

In the event that the shareholder does not wish to exchange the rights for new shares, the entity guarantees a single payment of 0.015 euros per right. In turn, let's imagine that the price of the right is trading at 0.012 euros.

Let's imagine that an investor named Pedro has 1,000 Banco de Santander shares in his portfolio, so he has to assess these three options:

  • Exchange of rights for new shares:

As it is an operation at par, Pedro will have 1,000 rights in his portfolio. The ratio is 1: 2, so you will have 500 new stocks in your portfolio. The total number of shares in your portfolio will be 1,500 shares.

  • Sale of rights in the market:

You can sell the rights on the market. We know that the right is trading at 0.012 euros. In this way, we have a payment of 1,000 rights * 0.012 = 12 euros. Pedro will try to sell them at the price he can since the price of the rights may vary. In turn, it must be taken into account that this movement may be subject to withholding tax.

  • Take advantage of the guaranteed minimum payment:

Banco de Santander ensures a guaranteed minimum payment of 0.015 euros for the rights generated. That is, 1,000 * 0.015 = 15 euros. This movement may be subject to withholding tax.

Generally, this type of movement is carried out in order to absorb debts, a fact that must be fully assessed in the event that the value is invested in the long term.

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