The dividend dilemma

Historically, when a company declares a dividend, new shares issued before the ex-date are not entitled to the dividend. These shares are traded as "A" shares until the ex-date, when they are merged with normal shares. — Reuters

DIVIDENDS – as investors in a public listed company, one of the investment thesis that attracts the investment public, is not only for a company to have a formal dividend policy, but one that pays to the legitimate shareholders of a company for the financial period ended in any given year.

Legally, as defined under Section 131(1) of the Companies Act, 2016, a company may only make a distribution to the shareholders out of profits of the company available if the company is solvent.

Once a company closes the financial year and announces its full-year financial statements, dividends are generally declared at the date of this announcement.

In certain instances, final dividends are declared between the release of the final quarter’s unaudited results and the release of the company’s annual report.

There are also instances when a company declares interim dividends with some companies opting to pay on a semi-annual basis, while others do it quarterly, which is a generally accepted mode of distribution for a real estate investment trust (REIT).

Upon the declaration of a dividend on a given date, there are several subsequent important dates that investors must bear in mind.

The first is the ex-date of the dividend. This is the date when the company’s shares are traded in the market, whereby new shareholders who purchased shares of a company are not entitled to the dividend that was declared.

The next important date is the record date and for Bursa Malaysia-listed companies, this date is the next trading day after the ex-date, and shareholders that appear on the company’s registrar are entitled to receive the dividend declared.

The final date to remember is the dividend payment date, which as the name suggests, is the date when the dividend that was declared by the company is finally paid to shareholders.

The simple rule of thumb when it comes to ordinary shareholders is that all shareholders are treated equally and whenever new shares are issued, the shares ranked pari-passu with other shares that have been in issuance before.

Hence, when a dividend is declared after the financial year-end, all outstanding shares will be entitled to the said dividend.

However, what happens when there are new shares issued post the financial year-end but before the declaration of the dividend is made?

Will these new shares too be entitled to receive the same dividend or are they excluded?

In a recent case involving Pavilion-REIT (P-REIT), the company raised some RM720mil via the issuance of 590.2 million new P-REIT units.

The units were issued to part-finance the company’s acquisition of Pavilion Bukit Jalil (PBJ), which cost some RM2.2bil.

Prior to the issuance of these new units, P-REIT had some 3,055.7 million units in issuance, and for the financial year ended Dec 31, 2022, the company declared a final dividend of 4.29 sen per unit with the dividend ex-date set on Feb 15, 2023.

The condition precedent as set out in the sale and purchase agreement to acquire PBJ was fulfilled on May 15, 2023.

The next day, P-REIT declared an advanced income distribution of 3.65 sen for the financial year ended Dec 31, 2023, with the ex-date set on May 29, 2023, and the entitlement date as May 30, 2023.

P-REIT also announced that it had fixed the placement price for the new units to be issued on May 16, 2023 at RM1.22 per unit, and also announced that the new placement units will not be entitled to the advanced distribution that was announced.

The new P-REIT units were listed on June 1, 2023, right after the entitlement date for the advanced distribution.

For a REIT, it is normal for any REIT to declare advanced distribution as new shares issued for acquisition pursuant to the acquisition of a new asset are generally not entitled to receive income or dividend that is accrued for existing assets.

In essence, there is a cut-off between current and new unitholders.

Skyworld Development Bhd was listed early this week, and prior to the listing, the company had announced its full-year results on July 4, 2023, which showed a strong performance by the company with a net profit of RM144mil.

This translated to a basic earnings per share of 230.39 sen as the company’s total number of outstanding shares stood at 62.5 million as at the end of March 31, 2023.

As part of its initial public offering (IPO), the company undertook a bonus issue on the basis of 1,409 bonus shares for every 125 shares held on May 3, 2023, as well as a bonus issue on the basis of three irredeemable convertible preference shares (ICPS) for every one SkyWorld shares held.

In addition, SkyWorld also issued 25 million new shares for the acquisition of the remaining 40% stake in NTP World Corp on May 11, 2023.

This saw the company’s share base jumping to 792 million shares and the IPO itself comprised the issuance of 208 million new shares under its public issue and another 192 million shares via an offer for sale by existing shareholders.

As the balloting for the IPO was completed on June 30, 2023, notice of allotment to the successful applicants was carried out just prior to the listing date on July 10, 2023.

Hence, the 208 million new shares were likely issued between July 1, 2023, and July 7, 2023.

The question is, when SkyWorld announced its three-sen dividend on July 4, 2023, for the financial year ended March 31, 2023, were the 208 million new shares entitled to enjoy the dividend declared by the company?

After all, these new shares may have even been issued after the announcement of the full-year results and surely these new shares cannot be “entitled” to receive dividends for the March 31, 2023 financial year-end.

It will be depriving the existing shareholders of full distribution while new shareholders were non-existent during the last full financial year.

For the same ringgit value of the distribution of RM30mil (three sen per share for the enlarged share base of one billion shares in issue), the original SkyWorld shareholders prior to the IPO should instead be paid a dividend of 3.7879 sen per share.

Yes, on the record date or entitlement date, all shareholders are ranked equally but surely the regulators ought to realise that something is amiss when new shareholders from the IPO are getting paid a dividend that they are not entitled to.

Historically, we have seen when a company declares a dividend and new shares are not entitled to receive a declared dividend, a separate quotation for the listed shares in the form of “A” shares is introduced up to the ex-date and on the ex-date, the “A” shares and normal shares are merged.

This is the right treatment for newly issued shares.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.