We’ve covered the different types of dividend issues in brief. Thanks to a request we went on to discuss the bonus and rights issues. Now we will go on to look at the dividend issue or stock dividend. It would really help if you have read about the bonus issue as the dividend issue shares a lot of similarities with this issue. The difference that we will focus on in this issue comes mainly in the form of the shares that are issued to shareholders. The dividend issue can be likened to the property dividend. Let’s understand the issue first.
A company elects that instead of paying a cash dividend they would rather offer shareholders shares in one of their subsidiary companies. Thus instead of receiving a cash dividend, the shareholders will receive shares in a company that will be unbundled from the parent company in which they hold shares. This results in the subsidiary company separately listing on the stock exchange as a standalone company.
The shares issued are fully paid up shares of the subsidiary company. What this means is that shareholders will not be required to make any additional payments to the company for these shares. The share capital in this case is paid for by the issuing company. The issuing parent company will essentially cede its shareholding, whole or partial in the subsidiary company. In the books of the parent company, a transfer would be made from reserves or profit (which dividends are normally paid from) to compensate the company for the shares in the subsidiary. Why would a company do this?
For the issuing or parent company the dividend issue would represent an opportunity to meet their obligations to pay dividends to shareholders without stressing the cash resources of the company. This is important if they do not immediately have cash for a dividend or this would impact their cash position detrimentally. In addition to the financial advantages the parent company may seek to unlock value that is trapped in a subsidiary. In the history of the Zimbabwe stock exchange such events have lead to booming of the unbundled companies in terms of market value.
Similar to bonus issue
The similarities to the bonus issue are evident from the company point of view. No changes are made in the share capital position of the company or the distribution of its shareholding. The event does not change the percentages or concentrations of holding of the parent company. The unbundled subsidiary would experience a change in shareholding as holders of the parent would be allocated shares in the subsidiary. Just like a bonus issue the recipient shareholders have the option of selling the unbundled company’s shares to receive cash or hold on for expected growth and future cash flows. In this way the dividend issue also considered an IOU issue, where the benefits can be realised in the future.
On the ZSE the best example of this we can look to is the issue of Proplastics shares as dividend to shareholders of Masimba Holdings in 2015. Masimba Holdings shareholders received shares of Proplastics which up to then was a subsidiary of Masimba Holdings. The shares were awarded in proportion to their holdings in Masimba. Since 2015 Proplastics has brought capital gain to shareholders as well as dividends of their own. Another very good example is the unbundling of now Victoria falls Stock Exchange-listed SeedCo International which was originally unbundled by SeedCo Limited to SeedCo limited shareholders in 2018. This gets a little more complicated than the proplastics issue as the unbundled SeedCo International was dual listed on the ZSE and the Botswana Stock Exchange. And then we throw in the recent drama in which the unbundled entity SeedCo International was set to acquire its former parent SeedCo Limited. If you can keep up it will also give you a very good understandng of the dividend share issue.
The dividend issue or dividend specie represents a nexus for us between two important matters we have been looking. Company share issues and company dividends. While the event has been rare on the ZSE it is not rare in the world of public listed companies.