DRIP pro/con for the issuer (not the investor)

[Xerxes]

I think the pro/con of DRIP is well know for the investor point of view (less/no transaction, a bit of discount)

 

What is the pro/con for the company that has the DRIP program. 
 

If company has $2 in assets, funded by $1 of liabilities and $1 of equity, and a 50cent dividend that is paid out as cash dividend.

 

Scenario A: investor takes the cash and walks away. That will reduce asset and equity by 50cents. increasing financial leverage. Simple enough.  

 

Scenario B: if the  hypothetical investor participated in the DRIP program, that 50cent stays in the company coffers as cash. Company issues new shares (dilution)  to back those would-have been dividends. 
 

What happens to the right hand side b/s ?!?

 

 

Scenario C if the  hypothetical investor takes the 50cent dividend in cash and him/herself buys is more share (no DRIP no dilution). Like scenario A, this will reduce asset and equity by 50cents. increasing financial leverage. Simple enough. But shareholder balance sheet has now more shares.
 

 

I am struggling with Scenario B ?

[lnofeisone]

A DRIP can work in two ways: New stock plan and  Open market purchase plan.

 

What you are describing is the New stock plan (NSP). Those are the companies that often offer discounts on shares. For tax purposes, you do have to pay tax on fair market value (i.e., current cost of the share). Pro: The company is getting new capital (keeping the dividend cash and issuing shares) so it's a form of dilution but a good capital management technique. Con: The company has to hire someone to track the DRIP plan and be compliant. 

 

Open market purchase (OMP) Dividend is sent to a trustee and the trustee will buy the shares on the open market. This is similar to your scenario C. Pro: None that I can think of. Con: The company has to pay a fee to a trustee to manage the plan. 

[dwy000]

4 hours ago, Xerxes said:

I think the pro/con of DRIP is well know for the investor point of view (less/no transaction, a bit of discount)

 

What is the pro/con for the company that has the DRIP program. 
 

If company has $2 in assets, funded by $1 of liabilities and $1 of equity, and a 50cent dividend that is paid out as cash dividend.

 

Scenario A: investor takes the cash and walks away. That will reduce asset and equity by 50cents. increasing financial leverage. Simple enough.  

 

Scenario B: if the  hypothetical investor participated in the DRIP program, that 50cent stays in the company coffers as cash. Company issues new shares (dilution)  to back those would-have been dividends. 
 

What happens to the right hand side b/s ?!?

 

 

Scenario C if the  hypothetical investor takes the 50cent dividend in cash and him/herself buys is more share (no DRIP no dilution). Like scenario A, this will reduce asset and equity by 50cents. increasing financial leverage. Simple enough. But shareholder balance sheet has now more shares.
 

 

I am struggling with Scenario B ?

easiest way to think of it is if every shareholder was in a DRIP.  For newly issued shares the right side of the balance sheet is unchanged but the share count increases (equity reduced by dividend and increased same amount by newly issued shares).  It's basically a stock dividend and is dilution for everyone. I think generally DRIP's are so small relative to shareholders taking cash it doesn't matter much.  

[Xerxes]

Thank you both. 
 

I think to see it as “stock dividend” makes sense. 

[dwy000]

1 hour ago, Xerxes said:

Thank you both. 
 

I think to see it as “stock dividend” makes sense. 

forgot to reiterate what Inofeisone mentioned - if the plan is a true "reinvestment" plan and not one that issues new shares, you will effectively be receiving cash and simultaneously be making a market purchase of stock.  There's price risk there for a very short period of time but the important difference is the accounting: lower Equity by the amount of the dividend and simulaneously lower cash.  The share count would be unchanged.  You will be taxed as a regular dividend even though you didn't net any new cash in your account.