Financial Question on Scrip Issues
Discussion
Mods don't move this to the finance forum just yet please, as there seems to be little traffic in there.
I was wondering if anyone could help me out with this. Why does a company need to capitalise reserves on its balance sheet for a scrip issue? If the shares are worth the same but there's more of them, why the need for more capital? Is it so the company can still pay out a constant dividend per share?
I was wondering if anyone could help me out with this. Why does a company need to capitalise reserves on its balance sheet for a scrip issue? If the shares are worth the same but there's more of them, why the need for more capital? Is it so the company can still pay out a constant dividend per share?
daveco said:
Melch said:
The company's increasing the number of shares in issue so will need to increase the share capital in its balance sheet.
It's increasing the number of shares in issue but decreasing the value of each share so equity capital is constant no? You're right about the value of the shares, you would expect the market cap to stay the same, so share price goes down in proportion to the number issued. However, if traders think the company has a good use for the capital it raises, the share price may hold or go up, based on expected future earnings from the use of the new capital.
louiebaby said:
Share capital on the balance sheet has nothing to do with what level the shares are trading at on the relevant exchanges. I'm not sure quite how it is calculated, but this is something I struggled with at Uni. I forget the answer now too.
You're right about the value of the shares, you would expect the market cap to stay the same, so share price goes down in proportion to the number issued. However, if traders think the company has a good use for the capital it raises, the share price may hold or go up, based on expected future earnings from the use of the new capital.
That's the problem I'm trying to get my head around. You're right about the value of the shares, you would expect the market cap to stay the same, so share price goes down in proportion to the number issued. However, if traders think the company has a good use for the capital it raises, the share price may hold or go up, based on expected future earnings from the use of the new capital.
Any new equity capital raised is the product of the new, lower price per share after the scrip issue; why the need to capitalise anything if the value of each share is the same with a scrip issue??
daveco said:
If the shares are worth the same but there's more of them, why the need for more capital?
There isn't more capital per se - but the share capital is increased by the nominal value (e.g. 5p X nuumber of shares) of the newly created shares - this amount is then taken off another part of the balance sheet.hombrepaulo said:
Its the increase in nominal value.
Say you have 100 shares in issue with nominal value or £1 each - therefore your Share capital is £100
If you now do a 1:1 scrip issue you now 200 shares still with a nominal value of £1 each- therefore your share capital is now £200
Wouldn't that be a decrease in nominal value? e.g. you hold 100 shares at £1 each, which are now valued at 50p with an increase to 200 shares held after the scrip issue.Say you have 100 shares in issue with nominal value or £1 each - therefore your Share capital is £100
If you now do a 1:1 scrip issue you now 200 shares still with a nominal value of £1 each- therefore your share capital is now £200
Why the need to capitalise something on the balance sheet before the scrip issue, i.e. before the nominal value of each share is decreased?
daveco said:
Wouldn't that be a decrease in nominal value? e.g. you hold 100 shares at £1 each, which are now valued at 50p with an increase to 200 shares held after the scrip issue.
Why the need to capitalise something on the balance sheet before the scrip issue, i.e. before the nominal value of each share is decreased?
The clue is in the word 'nominal'.Why the need to capitalise something on the balance sheet before the scrip issue, i.e. before the nominal value of each share is decreased?
I do a lot of financial analysis and I have literally NEVER looked at that share capital line on the balance sheet.
The nominal value of the shares is entirely meaningless as far as I am concerned.
With scrip issues the hugely important point is to make sure you get the FULL share count right.
That's all that matters.
Why?
Well every equity valuation metric is going to come down to the value of the business in the end.
Let's say you believe the business is worth £1bn.
So, what is the intrinsic value of a share?
Obviously, £1bn less net debt, pensions, minorities etc... divided by the FULL OUTSTANDING NUMBER OF SHARES.
The nominal value of the shares is entirely meaningless as far as I am concerned.
With scrip issues the hugely important point is to make sure you get the FULL share count right.
That's all that matters.
Why?
Well every equity valuation metric is going to come down to the value of the business in the end.
Let's say you believe the business is worth £1bn.
So, what is the intrinsic value of a share?
Obviously, £1bn less net debt, pensions, minorities etc... divided by the FULL OUTSTANDING NUMBER OF SHARES.
We seem to be going off topic here a bit.
The nominal value of each share changes in direct proportion to the amount of new shares being issued, so there isn't any need to raise new capital.
This is my point. Why does a company need to capitalise anything if no new capital needs to be raised?
The only reason I can see why there would be a need for it is that dividend payouts remain constant, even after the scrip so more capital would be needed for this...?
The nominal value of each share changes in direct proportion to the amount of new shares being issued, so there isn't any need to raise new capital.
This is my point. Why does a company need to capitalise anything if no new capital needs to be raised?
The only reason I can see why there would be a need for it is that dividend payouts remain constant, even after the scrip so more capital would be needed for this...?
daveco said:
The nominal value of each share changes in direct proportion to the amount of new shares being issued, so there isn't any need to raise new capital.
OK, I think I see what you are asking.Have a read here: http://moneyterms.co.uk/scrip-issue/
Let me have a go at explaining what I think is going on, although this is clearly an accounting issue (which I am not great at) rather than a valuation issue (which I know lots about).
The nominal value of a share never changes.
Let me say that again NOMINAL VALUE (note: not intrinsic value or inherent value or anything to do with the share's actual worth) NEVER CHANGES.
So what is happening with a scrip issue?
Let's say it is 1 for 10 and beforehand there were 100m shares with a nominal value of £1.
At this point the share capital is £100m. (100m x £1). And for argument's sake lets say there was £100m of retained earnings.
Then you have the scrip (also issued with a nominal value of £1 each).
So the new share count is 110m and the share capital is £110m. And as a result retained earnings will have to drop to £90m since can't just grow the balance sheet without doing anything. (Remember the shareholders are just GIVEN the shares, they don't have to pay the £1 for them.
This is completely different to a rights issue, where the sharecount rises but so does the capital in the business.
Of course the opposite to a scrip issue can happen and that's a reverse stock split, IIRC.
Out of interest why do you care?
walm said:
OK, I think I see what you are asking.
Have a read here: http://moneyterms.co.uk/scrip-issue/
Let me have a go at explaining what I think is going on, although this is clearly an accounting issue (which I am not great at) rather than a valuation issue (which I know lots about).
The nominal value of a share never changes.
Let me say that again NOMINAL VALUE (note: not intrinsic value or inherent value or anything to do with the share's actual worth) NEVER CHANGES.
So what is happening with a scrip issue?
Let's say it is 1 for 10 and beforehand there were 100m shares with a nominal value of £1.
At this point the share capital is £100m. (100m x £1). And for argument's sake lets say there was £100m of retained earnings.
Then you have the scrip (also issued with a nominal value of £1 each).
So the new share count is 110m and the share capital is £110m. And as a result retained earnings will have to drop to £90m since can't just grow the balance sheet without doing anything. (Remember the shareholders are just GIVEN the shares, they don't have to pay the £1 for them.
This is completely different to a rights issue, where the sharecount rises but so does the capital in the business.
Of course the opposite to a scrip issue can happen and that's a reverse stock split, IIRC.
Out of interest why do you care?
That's the confusing aspect of a scrip issue; a company uses it to reduce the value of each share and thus hopefully attract new investors. You state the shareholders are given the shares, which is correct, but my issues is the accounting side of this.Have a read here: http://moneyterms.co.uk/scrip-issue/
Let me have a go at explaining what I think is going on, although this is clearly an accounting issue (which I am not great at) rather than a valuation issue (which I know lots about).
The nominal value of a share never changes.
Let me say that again NOMINAL VALUE (note: not intrinsic value or inherent value or anything to do with the share's actual worth) NEVER CHANGES.
So what is happening with a scrip issue?
Let's say it is 1 for 10 and beforehand there were 100m shares with a nominal value of £1.
At this point the share capital is £100m. (100m x £1). And for argument's sake lets say there was £100m of retained earnings.
Then you have the scrip (also issued with a nominal value of £1 each).
So the new share count is 110m and the share capital is £110m. And as a result retained earnings will have to drop to £90m since can't just grow the balance sheet without doing anything. (Remember the shareholders are just GIVEN the shares, they don't have to pay the £1 for them.
This is completely different to a rights issue, where the sharecount rises but so does the capital in the business.
Of course the opposite to a scrip issue can happen and that's a reverse stock split, IIRC.
Out of interest why do you care?
Why capitalise anything when the scrip issue doesn't cost the company anything? The balance sheet doesn't grow, unless new investors are attracted by the new lower price per share; it only decreases because dividends remain constant despite the increase in shares held.
The amount paid out on dividends is left up to the company so why jump the gun, capitalise an item and assume you'll be able to keep paying out the dividend at the rate you were paying it out before the scrip issue?
e.g. I held 100 shares, dividend was 20p per share. I now hold 200 shares after the scrip issue, and dividend payout is still 20p per share.
daveco said:
Why capitalise anything when the scrip issue doesn't cost the company anything?
It is just accounting rules. For some reason shares have a nominal or par value. It's meaningless.daveco said:
The balance sheet doesn't grow, unless new investors are attracted by the new lower price per share.
No.New shareholders don't grow the balance sheet.
They might drive up the price of the shares but that doesn't change the balance sheet.
The balance sheet only grows if there is a CAPITAL raising (e.g. a rights issue).
The scrip issue is free, no new capital, no change to balance sheet.
The price of the share doesn't affect the balance sheet.
daveco said:
It [the balance sheet] only decreases because dividends remain constant despite the increase in shares held.
The amount paid out on dividends is left up to the company so why jump the gun, capitalise an item and assume you'll be able to keep paying out the dividend at the rate you were paying it out before the scrip issue?
e.g. I held 100 shares, dividend was 20p per share. I now hold 200 shares after the scrip issue, and dividend payout is still 20p per share.
This is 100% wrong.The amount paid out on dividends is left up to the company so why jump the gun, capitalise an item and assume you'll be able to keep paying out the dividend at the rate you were paying it out before the scrip issue?
e.g. I held 100 shares, dividend was 20p per share. I now hold 200 shares after the scrip issue, and dividend payout is still 20p per share.
Let's say the company generates enough earnings and cash to pay out say £100m every year in dividend.
There are say 50m shares so each share receives £2 in dividend. Let's say the shares trade on a 4% dividend yield so they trade at £50 each.
That's quite high for UK stocks which are usually listed in pence; 5,000p seems a lot.
So the company decides to do a scrip issue to reduce the price of the share.
Say 10 for 1.
Now the share count is 500m. Nothing else has changed.
The market cap was 50m x £50 = £2,500m or £2.5bn.
It still is.
Where do the new shares trade? At £2,500m divided by the new share count 500m = £5 each, or 500p.
Now what about the dividend.
Well there are 500m shares and so if they wanted to pay £2 a share each they would need to find £1,000m or £1bn.
WTF??? No fricking way.
They HAD £100m to pay dividends, they STILL have £100m to pay dividends.
So they pay £100m/500m for each share i.e. 20p.
So the shares (now trading on 500p NOT 5,000p) again have a yield of 4%. NOT 40%. That would be ridiculous.
Finally PLEASE tell me what you are trying to do?
Are you an accountant or are you trying to value a stock?
walm said:
No.
New shareholders don't grow the balance sheet.
They might drive up the price of the shares but that doesn't change the balance sheet.
The balance sheet only grows if there is a CAPITAL raising (e.g. a rights issue).
The scrip issue is free, no new capital, no change to balance sheet.
The price of the share doesn't affect the balance sheet.
The price of the share doesn't affect the balance sheet but the new investors attracted by the lower ppshare do. The company use the new capital to invest, which raises capital.New shareholders don't grow the balance sheet.
They might drive up the price of the shares but that doesn't change the balance sheet.
The balance sheet only grows if there is a CAPITAL raising (e.g. a rights issue).
The scrip issue is free, no new capital, no change to balance sheet.
The price of the share doesn't affect the balance sheet.
walm said:
This is 100% wrong.
Let's say the company generates enough earnings and cash to pay out say £100m every year in dividend.
There are say 50m shares so each share receives £2 in dividend. Let's say the shares trade on a 4% dividend yield so they trade at £50 each.
That's quite high for UK stocks which are usually listed in pence; 5,000p seems a lot.
So the company decides to do a scrip issue to reduce the price of the share.
Say 10 for 1.
Now the share count is 500m. Nothing else has changed.
The market cap was 50m x £50 = £2,500m or £2.5bn.
It still is.
Where do the new shares trade? At £2,500m divided by the new share count 500m = £5 each, or 500p.
Now what about the dividend.
Well there are 500m shares and so if they wanted to pay £2 a share each they would need to find £1,000m or £1bn.
WTF??? No fricking way.
They HAD £100m to pay dividends, they STILL have £100m to pay dividends.
So they pay £100m/500m for each share i.e. 20p.
So the shares (now trading on 500p NOT 5,000p) again have a yield of 4%. NOT 40%. That would be ridiculous.
Finally PLEASE tell me what you are trying to do?
Are you an accountant or are you trying to value a stock?
To me it makes little or no sense for a company to dilute its shares by that amount; long term investors look at the dividend yield as a relative source of income. It is in the interest of the company to maintain a constant dividend payout, or as close as is possible to the figure before the scrip issue. Let's say the company generates enough earnings and cash to pay out say £100m every year in dividend.
There are say 50m shares so each share receives £2 in dividend. Let's say the shares trade on a 4% dividend yield so they trade at £50 each.
That's quite high for UK stocks which are usually listed in pence; 5,000p seems a lot.
So the company decides to do a scrip issue to reduce the price of the share.
Say 10 for 1.
Now the share count is 500m. Nothing else has changed.
The market cap was 50m x £50 = £2,500m or £2.5bn.
It still is.
Where do the new shares trade? At £2,500m divided by the new share count 500m = £5 each, or 500p.
Now what about the dividend.
Well there are 500m shares and so if they wanted to pay £2 a share each they would need to find £1,000m or £1bn.
WTF??? No fricking way.
They HAD £100m to pay dividends, they STILL have £100m to pay dividends.
So they pay £100m/500m for each share i.e. 20p.
So the shares (now trading on 500p NOT 5,000p) again have a yield of 4%. NOT 40%. That would be ridiculous.
Finally PLEASE tell me what you are trying to do?
Are you an accountant or are you trying to value a stock?
That is why I think the company needs to capitalise items; to raise capital to keep the dividend payout as close to the figure it was before the scrip issue.
What do I do? I read books on seemingly boring subjects and struggle to understand them!
Your help is appreciate on this Walm, as is everyone elses.
daveco said:
The price of the share doesn't affect the balance sheet but the new investors attracted by the lower ppshare do. The company use the new capital to invest, which raises capital.
This is wrong.There is no new capital.
If new investors invest because of a lower price per share, they are simply buying shares from old investors in the open market.
THERE IS NO NEW CAPITAL.
daveco said:
To me it makes little or no sense for a company to dilute its shares by that amount; long term investors look at the dividend yield as a relative source of income. It is in the interest of the company to maintain a constant dividend payout, or as close as is possible to the figure before the scrip issue.
That is why I think the company needs to capitalise items; to raise capital to keep the dividend payout as close to the figure it was before the scrip issue.
You have a fundamental misunderstanding.That is why I think the company needs to capitalise items; to raise capital to keep the dividend payout as close to the figure it was before the scrip issue.
It is between the phrase "dividend yield" and "dividend payout".
In my example the YIELD (which is what people care about) remains the same. It is 4% before. It is 4% after.
No one gives a flying crap about the "payout" in absolute terms. What they care about is the payout RELATIVE TO THE PRICE OF THE SHARE.
That is the YIELD.
You keep crapping on about RAISING CAPITAL this and CAPITALISING that.
You clearly don't understand what those terms mean.
One of the most ridiculous suggestions I have ever heard would be to RAISE CAPITAL in order to PAY A DIVIDEND.
They are almost the exact opposites of each other.
You issue new shares in exchange for cash (RAISING CAPITAL).
Then you give that cash back in the form of a dividend.
Any management team doing that should be taken out and shot.
You are I am afraid, talking b
ks.Whatever book you are reading put it down now and burn it.
Scrip issues are in 99.9% of cases ENTIRELY IRRELEVANT.
I am out.
walm said:
daveco said:
The price of the share doesn't affect the balance sheet but the new investors attracted by the lower ppshare do. The company use the new capital to invest, which raises capital.
This is wrong.There is no new capital.
If new investors invest because of a lower price per share, they are simply buying shares from old investors in the open market.
THERE IS NO NEW CAPITAL.
daveco said:
To me it makes little or no sense for a company to dilute its shares by that amount; long term investors look at the dividend yield as a relative source of income. It is in the interest of the company to maintain a constant dividend payout, or as close as is possible to the figure before the scrip issue.
That is why I think the company needs to capitalise items; to raise capital to keep the dividend payout as close to the figure it was before the scrip issue.
You have a fundamental misunderstanding.That is why I think the company needs to capitalise items; to raise capital to keep the dividend payout as close to the figure it was before the scrip issue.
It is between the phrase "dividend yield" and "dividend payout".
In my example the YIELD (which is what people care about) remains the same. It is 4% before. It is 4% after.
No one gives a flying crap about the "payout" in absolute terms. What they care about is the payout RELATIVE TO THE PRICE OF THE SHARE.
That is the YIELD.
You keep crapping on about RAISING CAPITAL this and CAPITALISING that.
You clearly don't understand what those terms mean.
One of the most ridiculous suggestions I have ever heard would be to RAISE CAPITAL in order to PAY A DIVIDEND.
They are almost the exact opposites of each other.
You issue new shares in exchange for cash (RAISING CAPITAL).
Then you give that cash back in the form of a dividend.
Any management team doing that should be taken out and shot.
You are I am afraid, talking b
ks.Whatever book you are reading put it down now and burn it.
Scrip issues are in 99.9% of cases ENTIRELY IRRELEVANT.
I am out.
Either way your input has been appreciated, even if you have MIS READ EVERY SINGLE ONE OF MY POSTS. They capitalise items on the balance sheet to cover dividend payouts; they don't raise capital. And the dividend yield is the f
king pay out you pedantic st.daveco said:
And the dividend yield is the fking pay out you pedantic st.
Feel free to explain where I have mis-read, but you are still wrong.king pay out you pedantic st.The dividend YIELD is the PAYOUT divided by the share price at any point in time.
For example Cable & Wireless Worldwide today confirmed they will be paying out (PAYOUT geddit?) 4.5p this year and next.
4.5p - that is the payout.
So what is the yield?
Well, the stock closed at around 52p so the stock has a dividend YIELD of 4.5/52 = 8.7%.
Yield is expressed in percentage, payout in absolute value. THEY ARE NOT THE SAME THING.
If for some reason C&WW decided to do a scrip and double their share count, the stock would drop to 52/2 = 26p.
Would they still PAYOUT 4.5p???? NO ABSOLUTELY NOT.
They would payout 4.5p/2.
The payout would halve.
BUT THE YIELD REMAINS THE SAME. The new yield is 2.25p/26p = 8.7%.
Why don't you give a real world example of what is troubling you?
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