The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
It is remarkable how the market makers have been able to keep the share price fixed at almost exactly 25.5p now for days on end. The consensus is that the share price should be exactly one half of the net asset value of the company. It is unusual for the market makers to retain a fixed share price for so long a period. It will be interesting to see how long this fixed price will last.
As far as I know, there are no restrictions on how often a company can make use of a scrip dividend. A scrip dividend is like a mini “rights issue”. It bolsters the cash position of the company, eventually, over time, making it more valuable, as the net debt of the company is reduced.
There is a different between the profits from trading and the overall value of the company. As an REIT, Hammerson must pay out at least 90% of its trading profits. It has consistently done so, generally by way of the issue of a scrip dividend, by which shares equal to the value of the trading profit, about 2p per share, are distributed, rather than an actual cash dividend. Those shareholders wishing to have an income in cash can then simply sell their scrip dividend shares. So, in fact, with the current share price of 25p, a dividend of 2p represents a distributed profit of about 8% which is excellent, by comparison with other REITs, which generally, do not achieve a return (based on their share price) any higher than 6%.
The low share price is a result of the company being seen as a risky investment, the risk being associated largely with its high level of indebtedness. This risk can be reduced, of course, if the company pays out its profits in the form of a scrip dividend.
All REITs must pay out all of their net profit so Hammerson will always pay a dividend as it is running quite profitably. It makes no difference at all whether the dividend is paid out in cash or by way of a scrip dividend, since the shareholder is able to sell the new scrip shares so as to have the dividend in cash, if he wishes. So, the form in which the dividend pays will have no affect on the share price at all. This is clear enough - in announcing that part of the profits will be paid out as a cash dividend, rather than as a scrip dividend, the share price has not altered at all, for the simple reason that the net position is exactly the same, in whatever form the dividend is paid. However, in the longer term, the company will become more attractive if the dividend is paid out in the form of a scrip dividend, since the indebtedness of the company will be reduced, making it a less risky investment.
For a long time now, the market has set the share price for Hammerson at one-half of its net asset value per share, so, with a NAV of 51p, the current share price of 25.5p seems in accordance with historic market sentiment. However, if the sale of the share in Bicester Village were to come off, then the share price would, of course, depart from this historic setting, since the company would then have a much lower indebtedness and most risk would disappear. There does not appear to be any news on this possible disposal, though.
It makes absolutely no difference to the shareholders whether the dividend is paid out in cash or by way of a scrip dividend. To comply with the rules relating to a REIT, the dividend does need to be paid out in one way or the other, but it makes absolutely no difference to the shareholders in what form they receive the dividend. Paying the dividend as a scrip dividend does enhance the cash position of the company, and is, in principle, more in the interests of the shareholders. So, let us hope for a prudent decision to pay out the dividend in the form of shares, rather than cash.
This sale is good news. The share price had, possibly, been marked up rather higher than this news really merited. It has settled back to a more realistic level now, at about 25.5p where it is likely to remain, with a little bit of a fluctuation when the figures which everyone expects are finally confirmed on Thursday. The sale of the interest in Bicester Village would be likely to lift the share price considerably, of course.
The “cash” option is offered only as a matter of form. No shareholder is expected to actually ele to to receive it. For those who require an income from their holding, the procedure is to wait until the scrip dividend has been issued and to then sell the shares. For the shareholders, the payment of the dividend by way of a scrip dividend is entirely neutral. For the company, it is very beneficial, since it amounts, in practical terms, to a rights issue. Essentially, those buying the scrip dividend shares are boosting the company’s cash position.
Yes - based on a share price of, say, 25p, a dividend of 2p per share represents an income of 8%. I cannot see any difference, in principle, between a scrip dividend and a cash dividend. Once the new shares have been issued, they can be sold and turned into cash. So, what is the difference?
Hammerson has, of course, being paying a very generous dividend in recent years. I am not able to follow why those who do require a cash income from their holding do not simply sell the script dividend when the new shares are issued. What is the difference between receiving a cash dividend of 2p per share and new shares of a value of 2p per share? Those who need a cash income may simply sell the new shares when they are issued. In accounting terms it is quite neutral. On the one hand, the value of the company goes up by the amount of the dividend retained, this being balanced by the number of shares held going down if the new script dividend shares are sold.
I don’t think that it will work that way. Most of the shares are held by large, institutional, investors, who are concerned about the long term prospects for the company. These can only be improved by reducing the net debt position. A low share price does not bother large institutional investors. They did not buy to sell quickly at a profit, but to achieve a long term capital gain. The shares are, currently, trading at almost half of the net asset value per share, so that the artificially depressed share price affords large institutional investors the opportunity of increasing their holdings in the company on very favourable terms.
Hopefully, Hammerson will continue with its wise policy of issuing new shares instead of paying a dividend this year. For those who need an income, the new shares can be sold. It is a simple say of having an annual “rights issue” to bolster the financial position of the company. Paying out a dividend in cash does not, in fact, improve the market value of the company. The market value of the company will be improved by reducing its net debt.
Hammerson has fallen almost exactly in line with the fall in other property REITs. Currently, property of any kind (even residential property) is no longer seen as a good investment and there is a flight from equities into fixed interest investments. As the price falls, the return by way of dividend income increases, so, at some point, Hammerson (and other property REITs) will begin to seem attractive, by reference to the returns on fixed interest securities.
Don’t hold your breath! All REITs are trading at about 60% of their net asset value, so that it is not likely that the price will rise much above 30p, based on present valuations. However, 30p would still be quite nice!
I am not sure about this particular dividend, but in the case of all other dividends which I receive from REITs, the initial payment is 80% of the full dividend and the remaining 20% appears later in my account, under the description “tax reclaimed”.
The current strategy of the Directors is to reduce the companies debt, or, if not reduce, it, renegotiate it so that it has a longer maturity date. If the creditors have no control over the company, because it is not in breach of any of the covenants under its debt, it can be free to just sit tight and wait for the economy to improve. Not just the British economy - the company has properties abroad, as well, spreading the risk more widely than those REITs whose assets are situated only in the United Kingdom.
I am not able to see how raising money by committing to a long term interest rate of 7.5% until 2028 can be a wise move. Interest rates might well fall. Also, paying off the 3.5% Bonds which do not mature until 2025 doesn’t seem to make much sense. Better to just invest the cash required to pay them off - possibly at a higher rate of interest, until it is needed. However, it does, of course, provide certainty in a very uncertain market. Possibly that is why the price rose to 25p this morning, after having fallen to 23.8 on Friday after the news.
One reason why the prices of shares in REITs might be “softening” at the moment is that the Government has just announced that it is offering over 6% on National Savings Bonds. It is now offering a rate of interest comparable to that which shares in REITs are offering by way of dividend income, but with absolutely no risk of loss of capital, up to a maximum, I think, of a million pounds. This may be enough to tempt many investors away from equities and into bonds.