Forum Archive Index - June 2002

["Shares" <shares@whoami.com>]

Most if not all DRIP's price the shares at the average or mean price that
the shares trade for the 5 days following the share being ex-dividend.
Hence the price paid is reasonably fair and accurate, even more so if issued
at a discount.

EK
----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Tuesday, June 25, 2002 12:33 AM
Subject: [sharechat] Dividend Reinvestment Plans (was Re:WRI)


> Hi terry,
>
> >
> >so  your saying it is a great investment at this time
> >for the DRIP investor.
> >
>
>
> Actually I think it would be a very bad idea to get involved in any
> Wrightson dividend reinvestment plan.   But that is because I am not
> in favour of dividend reinvestment plans at all for 'income' shares.
> My logic is as follows.
>
> Dividend reinvestment plans are a way to build up your shareholding
> in a company by accepting new shares instead of a cash dividend.  The
> strike price of these shares is normally set based on the market
> price of the shares, typically based on some sort of average price in
> the days before the dividend is due to be paid.
>
> When DRIPs first became available in New Zealand, typically a
> discount was offered on shared issued under such a plan.  This was
> sometimes as much as 5% of the prevailing share price.  These days
> the discount in such plans has been reduced to 2%, sometimes even
> less.  It is this low discount factor that kills these schemes for
> income share investors.
>
> For the purposes of this discussion, we'll define an income share as
> something that has a gross yield (before tax) of 6%  (6% is roughly
> what you might expect from having a term deposit in a bank).  Let's
> assume this dividend is paid out twice per year in two 3% chunks.  In
> the months before this payout, our theoretical 'income' share (which
> has a share price 'chart' that is a horizontal line) will ramp up
> slightly above its baseline level to take account of this coming 3%
> dividend.  Immediately after the dividend entitlement expires, the
> share price will drop back to its 'flatline' level (the 3% dividend
> being paid).  Now do you see the problem with this for our 'income'
> investor?
>
> The problem is that the shareprice has been ramped up because of the
> dividend by 3% at the very time the price for shares in lieu of
> dividends is being set.  So far from getting a real discount of 2% on
> the shares issued, our income investor is getting a discount on the
> inflated (by 3%) price of the shares just prior to dividend payment.
> If we allow for this the actual price of the shares issued compared
> to the shares flatline base level is:
>
> 0.98x1.03x(base level)= 1.009(base level)
>
> In other words our DRIP shareholder is not getting the shares at
> a discount to the market.   They are actually paying slightly *more*
> than market price (in this example)!
>
> In the case of Wrightson shareholders about to get a 7% payout per
> share in August, the dividend yield is much higher than 6%.  This
> means that any shares issued under a Wrightson DRIP, averaged on the
> share price five days before the ex-dividend date, and issued at a 2%
> 'discount' (sic) will really be getting their shares at:
>
> 0.98x1.07x(base level)= 1.05(base level)
>
> These shares will be issued at a price *5% more expensive* than if
> the shareholders had waited until the dividend was paid and then
> bought the shares on the market using cash!  Of course being an
> income investor our shareholder would need to sell his issued newly
> shares to satisfy his income requirements.  He would then have
> brokerage deducted from the shares he sold.  This means that the
> after fees cost of the new shares he has acquired is even more than
> 5% above the market price!
>
> This is a terrible result, and this is the reason I think that
> dividend reinvestment plans on an income share (Telecom NZ stands out
> as a good example of this) are a very bad thing for the income
> investor.  By contrast if you are invested in a 'growth' share, then
> a dividend reinvestment scheme can be a good idea.
>
> SNOOPY
>
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "You can tell me I'm wrong twice,
> but that still only makes me wrong once."
>
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