Question 9.E.1: What are the arguments for and against issuing a scrip divid...
What are the arguments for and against issuing a scrip dividend rather than a cash dividend?
A scrip dividend can help to maintain the total equity of the business as it simply involves a transfer from reserves to the ordinary share capital account. This means that there will be a change to the gearing ratio as a result of a scrip dividend. Scrip dividends can also help to conserve cash. Some shareholders may, however, wish to receive cash rather than shares and so a business may offer shareholders the choice of a cash dividend or a scrip dividend. For those wishing to reinvest in the business, a scrip dividend offers the opportunity to acquire shares without incurring share transaction costs. Scrip dividends may undermine the prospects of making rights issues as existing shareholders may be reluctant to invest beyond the scrip dividends.