This post is a continuation of my earlier discussion on the Macquaire International Infrastructure Fund scrip dividend scheme. If you haven’t read it yet, it would be better for you to do so before reading on.
Even though the title of this post is about MIIF dividend reinvestment, what is discussed will be generally applicable to other companies that offer scrip dividend as well.
The same example will be used but we’ll also be looking at a few cases where the share price is not trading close to the NTA.
First, a recap of the default scenario.
Stock A has 10,000 shares in circulation and the net tangible assets of the company is $10,000. The market price of each share is $1. Thus, the share is trading at NTA price.
$1 of asset can produce $0.05 in earnings so initially, the $10,000 that the company has produces $500 in profits.
The issue price of the scrip dividend is $1 per share.
You own 1000 shares of the company. Earnings attributable to you is $50.
We will only consider the case where you are the only one taking up the scrip dividend and the company is able to reinvest the excess cash to produce the same rate of return.
Total shares in issue is now 10050 shares and you own 1050 shares of the company. Company assets have gone up to $10050.
For the next period, earnings per share is $0.05 and your share of the earnings will be $52.50. It has compounded at 5%.
Now, let us consider 2 more cases:
Share price trading at $0.50, NTA is $1/share
The issue price of the scrip dividend is $0.50 per share.
After you receive the scrip, the number of total shares will be 10100 and you will have 1100 shares.
NTA/share = 10050/10100=$0.9950
Your share of the assets = $0.9950 x 1100 = $1094.55
Earnings per share (for the next period) = 502.50/10100 = $0.049752/share
Your share of the earnings = 0.049752 x 1100 = $54.73 (9.46% increase)
Even though earnings per share for the company has dropped, your own earnings has increased more (9.46%) than that achieved by the company (5%) using your additional funds.
Those who didn’t opt for the scrip will see a decrease in their total earnings as their number of shares has not changed.
Share price trading at $2, NTA is $1/share
The issue price of the scrip dividend is $2 per share.
After you receive the scrip, the number of total shares will be 10025 and you will have 1025 shares.
NTA/share = 10050/10025=$1.00249
Your share of the assets = $1.00249 x 1025 = $1027.56
Earnings per share (for the next period) = 502.50/10025 = $0.05012/share
Your share of the earnings = 0.05012 x 1025 = $51.38 (2.8% increase)
The result is the opposite of the previous case.
Even though earnings per share for the company has increased, your own earnings has increased less (2.8%) than that achieved by the company (5%) using your additional funds.
Those who didn’t opt for the scrip will see an increase in their total earnings even though their number of shares has not changed.
From the above calculations, the conclusion I draw is that if the share price is trading at a discount to NTA, it is good to take scrip. If it is trading at a premium, taking cash would be better.
Of course, that’s taking a simple approach as I’m assuming the company can reinvest my capital at the same rate of growth of 5%. Repeating the calculations for different growth rates might be tedious and impractical. One way of doing that is to use an Excel sheet.