Dividend reinvestment plans - cheap and effective, so why isn't Europe latching on?
Retail investors are in vogue in the US investor relations community right now. Talk to most leading IR officers in the US and they will enthusiastically detail the range of incentive and information programs their companies have in place to attract and retain retail investor dollars.
Woe betide those who take a different tack - in public at least. In the wake of the SEC's Regulation FD, no company wants to stand out as a corporate rogue favoring institutions over their retail investor brethren - regardless of the practicalities.
Of course, the reality is somewhat different. Most IROs spend a lot more of their time wooing professional investors than responding to the myriad information requests of Jon Doe and family from Anywhere, USA. Indeed, many are willing to admit as much in a strictly off-the-record format. Ply them with a few drinks and the nightmare stories about endless 'pesky' phone calls begin to emerge.
Yet in the current environment it is all about being seen to look after retail shareholders. And more often than not that also means instituting programs to help them. Whatever the true thinking behind it, the result is an increasingly favorable environment for retail investors. Regulators are pushing the level information playing field and IROs are doing their best to make sure they don't step out of line.
Poor relations
Contrast that situation in the US with the IR attitudes of many European companies and a stark difference is revealed. Many European blue chips continue to openly treat retail investors as the poor relations of their institutional counterparts. Yes, it is inevitable some respects but, with the regulatory mood in the UK and continental Europe changing, it could be a very dangerous game to play.
Take the UK, supposedly a market that rapidly follows the IR lead of the US. Sure enough, the UK's Investor Relations Society released its own guidelines last May dealing with selective disclosure issues. They stress the need for seamless disclosure of corporate information to all audiences at once and generally caution against preferential treatment of the professional investment community relative to private investors.
Get this: 'Investor and analyst presentations should be available to view on the web site simultaneously with the start of a meeting and a teleconference facility offered to enable users to listen to management's comments.' This is followed by: 'Webcasting of investor and/or analyst presentations, either live or archived, should be open to all interested parties.' The reality falls far short of these best practice guidelines with only a few top companies complying. And the UK is relatively advanced in these practices. Across continental Europe the private investor continues to get a woefully poor deal from many IR departments.
Watch out
The trouble is companies are soon going to start getting into legal trouble if they don't begin to mend their ways. A few lessons could be learned from the American experience. Show yourself willing and fewer questions will be asked - even if you still retain the old attitudes.
For example, UK regulations currently allow for a range of benefits for retail shareholders that cost corporations tiny amounts of money and effort relative to the goodwill they generate from shareholders in return. Yet again, a small number of companies have seized the opportunity.
Perhaps the most obvious example of this is dividend reinvestment plans - or Drips, as they are commonly known. These have become amazingly popular with US companies as a low cost means of exhibiting goodwill toward smaller shareholders.
In the UK, the tax environment was changed last year, which should have made Drips an obvious choice for companies looking to start a program to encourage private shareholders, but the take-up remains relatively low. A random sample suggests that some 30-40 percent of larger companies have instituted Drips; but that figure drops significantly lower as you move down the market capitalization scale.
With Drips cheap to establish and easily formulated to become cost neutral, you would think more listed companies would jump at the chance of offering such a benefit to smaller shareholders. But, although the take-up has improved in the last year, undoubtedly triggered by the tax changes, the majority of companies cannot be bothered to establish such a plan.
Drips allow smaller shareholders to plough their dividends directly back into the company's shares via a low-cost dealing mechanism established by the company or its registrars. Although most plans pass on some dealing costs to the shareholders - that is how it can become cost neutral - the purchase of existing shares means that commission costs can be kept well below traditional broker fees.
Right behind them
'A dividend reinvestment plan is a great way to help the smaller shareholder,' says Jeremy King, head of personal investments at Proshare, the London-based lobby group for wider share ownership. 'We're right behind it as a concept - it takes the effort out of increasing a shareholding.' He adds that retail shareholders benefit by a low-cost means of reinvesting their dividends, hopefully helping them to improve the performance of their initial stock purchase. The company, on the other hand, benefits from increased shareholder loyalty, the possibility of reduced administration of dividend checks and the steady growth of small shareholder investments. Despite the advantages, King perceives a general lack of interest from many companies about instituting a Drip.
Tom Morrison has a direct interest in promoting Drip programs, however. The chairman of registrar Computershare, his company runs programs for corporate clients who choose to go down the Drip route. He suggests it is merely an 'add-on' service, a value-add for clients. Computershare has seen a significant growth in the number of FTSE 100 Drips it runs for its clients - rising from around 23 percent to 38 percent over the last year - and much of that growth is probably attributable to the tax changes.
Morrison explains that the demise of Advance Corporation Tax (ACT) back in1998 made it less attractive for companies to offer scrip dividends, which had previously been ACT exempt, in preference to cash dividends. The demise of ACT sent the key corporate benefit of a scrip issue out the window. The growth of share buybacks also made scrips less appealing since they involve companies issuing new shares to replace cash dividends, diluting the existing stock - not the best of moves when you are seeking shareholder approval for buybacks at the same time. 'Drips are a nice tidy way for smaller shareholders to let their investments grow. It's a response to small investor requests rather than any direct benefit to a company,' says Morrison, adding that the benefit is really increased goodwill.
But despite modest growth in Drips at large-cap companies over the past couple of years, they are evidently not attracting wider interest. The fear is that scrips fade away and retail shareholders do not get any equivalent benefits in their place.
Loyalty question
Those UK companies that have instituted Drips report a healthy take-up from small shareholders and certainly believe they're more than worthwhile in terms of the loyalty they engender.
British Telecom introduced its Drip in 1999 after ACT was phased out. John Challis, shareholder services manager, says that ACT's abolition led to the disappearance of the cash flow savings from deferring corporation tax payments. That had previously been enough to offset the cost of running the scrip issue so when it ceased it was a natural step to look for a new solution for retail shareholders. BT's private shareholders participating in the Drip now have to pay 0.5 percent stamp duty and 0.5 percent for brokerage charges which, as Challis points out, still amounts to much less than the cost of buying shares through traditional means. BT can command the low commission charges due to bulk discounts on reinvesting dividends from so many shareholders all at once. And it doesn't contradict any buyback program either. Any odd change left over on each shareholder's account is rolled over to the next dividend payment and then the process repeats itself.
'We introduced it in response to shareholder requests,' reports Challis, 'but we are also trying to encourage shareholders to deepen their holdings too.' He believes the program works out as pretty well cost neutral to BT, with around 130,000 of the company's 2 mn private shareholders taking up the offer to join the Drip.
Numbers game
But it is not just the household names and privatized utilities with massive shareholder bases that see benefits in running Drips. AEA Technology introduced its Drip in mid-1999 and it is now open to any shareholder except for those resident in the US and Canada. 'It's a benefit that we saw other companies were offering and we wanted to do likewise,' says a spokesman in the corporate secretary's department. About 10-15 percent of AEA shareholders have signed up to the program - a relatively small number when you consider that the company only has around 10,000 private shareholders. Yet AEA thinks it is definitely worthwhile. 'It's roughly cost neutral, although we did invest a little bit in initial literature,' he says. 'The advantage is that all those dividends are reinvested in the company rather than having to send out lots of small checks in the post.'
Of course UK companies are somewhat stymied in that they cannot be seen to market their own stocks, potentially making it difficult to let shareholders know that a Drip is up and running. Nick Jones, a spokesman for ailing food and clothing retailer Marks & Spencer, points out that the company does not proactively market its Drip at all. Instead, the company prefers simply to make the Drip available to shareholders and mentions it in the annual report.
Look west
If the US example is anything to go by, a move toward direct stock purchase plans (DSPPs) in the UK and other continental markets where they remain outlawed could be coming along in the near future. DSPPs allow current and new shareholders to buy stock in a company direct from the company itself. Again, the investor benefits from the bulk-buying low dealing costs that are normally the sole preserve of institutional investors. Despite their popularity in the
US, a spokesman for the Financial Services Authority in London says that no discussions are currently underway regarding the introduction of DSPPs in the UK.
Investor relations officers seriously intent on leveling the playing field between institutional and retail investors might like to pursue the issue of Drips and DSPPs.
After all, there is little point in regulators ensuring that everyone is receiving the same level of information at the same time if other regulations bar access to reduced commission charges for smaller investors.