Published March 18, 2009

Scrip dividend scheme - make it a real choice

By SIOW LI SEN

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DBS Group Holdings has joined the ranks of companies to offer a dividend scrip scheme in an effort to conserve cash amid rising defaults in Singapore's worst recession.

In itself there is nothing wrong with trying to preserve cash during a downturn though tinkering with dividends in bad times is always suspect and hints at problems to come.

OCBC Bank last month said it was reviving its scrip dividend scheme and even threw in a discount as an incentive in a bid to conserve cash.

United Overseas Bank has cut its final dividend to 40 cents from 45 cents.

All three banks had reported significant increases in non-performing loans for the final quarter of 2008 and expect this year to be grim.

Roundabout way

DBS though seems to be going about conserving cash in a rather roundabout way.

First it raised $4 billion through a rights issue in January, then paid out the same dividend as before. CapitaLand also took the same route.

But companies say they can't forgo dividends because of commitments made to certain shareholders. It would be like reneging on a promise.

Also, retirees who depend on a steady stream of dividend as income would be upset if this was canned.

DBS said its scrip dividend scheme - which gives shareholders a choice to take the dividend in the form of ordinary shares instead of cash, in part or whole - will not be applied to the final dividend for the financial year ended Dec 31, 2008.

But it added that the directors have the discretion to determine which dividend the scheme will apply.

HSBC and Standard Chartered Bank have offered shareholders a choice of dividend scrip for years. The difference here is that the option once given has not been taken away.

It's a real choice for shareholders unlike what DBS and OCBC are doing.

These two sell the option as giving shareholders the choice but reserve the right to take it away when it suits the banks. So how can it be a choice when it's applied at will, at the bank's discretion?

Emphasis on survival

'It's all in the name of capital management which is a major determinant in bonuses and how senior management is being measured,' said Christopher Wong, investment manager, Asia equity, Aberdeen Asset Management Asia.

Aberdeen manages about US$25 billion of funds.

Right now, companies need cash and profits are going to be hit anyway because of rising bad debts, so the emphasis is on survival.

During good times, the banks don't want more shares out there as it will erode the return on equity (ROE).

In order to improve ROE, companies even buy back their own shares, arguing that shareholders benefit. The fact is that it also boosts one of the key performance indicators that senior managers are measured against.

DBS said shareholders will have to approve its scrip dividend scheme at the extraordinary general meeting on April 8.

The bank should make it a real choice for shareholders, not one to be doled out or withheld at will.