The use of scrip dividends by UK companies

Abstract

A UK company may give its shareholders the option to elect to receive additional shares in the company in lieu of a cash dividend. The share alternative is referred to as a scrip dividend. Scrip dividends offer tax savings to some UK companies, and may be beneficial to certain shareholders. The type of company that can benefit from scrip dividends is one that has structural surplus advance corporation tax (ACT). This may arise because the company distributes either foreign source profits or preference income (income that is subject to tax). There has been a decline in the number of companies with structural surplus ACT over the past ten years. This has been largely due to the reduction of preference income following the Finance Act of 1984. On the basis of the analysis presented in the paper it is expected that companies with structural surplus ACT will offer scrip dividends and, as the number of companies in this position has declined over the past decade, there will be a reduction in the number of companies offering scrip dividends. A company without structural surplus ACT obtains a timing benefit rather than a tax savings by offering scrip dividends. As there are costs in offering scrip dividends, it is expected that companies without structural surplus ACT will not offer scrip dividends. The results of the study show that the scrip dividends became popular amongst UK companies when fewer companies had preference income as the effect of the Finance Act of 1984. Also, contrary to expectations, companies without structural surplus ACT offer scrip dividends. Possible explanations for these results are discussed in the paper. The tax rules on scrip dividends make a scrip dividend equivalent to the value of the net cash dividend unattractive to some groups of shareholders. It is therefore expected that the take-up of the scrip alternative will be low. This is confirmed by the results of the stud