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Scrip dividends spur European sec lending returns

16 February 2017


Scrips represented 7.2% of the entire European securities lending revenue generated last year

Read more: scrips dividends securities lending

Scrip dividends are continuing to boost fees across the European securities lending market, statistics from IHS Markit show.

Beneficial owners earned over $106m of securities lending revenues around the 85 scrip dividends paid by Stoxx 600 constituents last year.

This represented 7.2% of the entire European securities lending revenue generated in 2016 - up from 4% in 2014.

Meanwhile total value of European scrip dividends has jumped ten-fold in over the last 10 years to reach €27bn in 2016.

"Economic headwinds in Europe have grown the cohort of cash conscious companies offering investors the option of receiving dividend payments in shares through scrip options," IHS Markit analyst Simon Colvin said in a note.

Issuers offer shareholders the choice of receiving a cash dividend or a scrip dividend (new shares) at a discount to the market price.

However, some funds are unwilling to take the scrip because their holdings would become larger than their investment guidelines permit.

In such cases, stock can be lent out with the borrower -  often a prime broker on behalf of a hedge fund - choosing the scrip and selling the newly issued shares in the market.

Proceeds are used to pay the lender the cash dividend they have forgone by lending the shares.

The borrower makes a profit equal to the difference between the market value of the shares and the cash dividend, less the stock lending fee.

"As the securities lending industry evolves and some of the historic sources of revenue generation decline, other sources of income are replacing them," Paul Wilson, global head of agent lending product and portfolio advisory at JP Morgan, told Global Investor/ISF. 

"Maximizing revenue from sub-optional scrip elections is becoming a low impact, high revenue opportunity especially with the increase in the number of companies offering a scrip dividend.

"We are finding our clients increasingly engaged and motivated in this area," Wilson added.

Data from IHS Markit shows financials and commodities companies have been some of the keenest scrip payers over the last decade.

Aegon, EDF as well banks Barclays and Credit Suisse are forecast to make scrip payments in the coming 12 months.

"The fact that these companies are among the most volatile side of the market bodes well for securities lending revenues heading into 2017," Colvin wrote this week.

"Credit Suisse is especially significant as it is the third largest European scrip payer and the securities lending market generated $2.4m of revenues the last time it paid a dividend back in June of last year."

While significant, the analyst points out that these numbers still pale in comparison to the $7.3m of securities lending earned by lending shares of largest scrip dividend payer, HSBC.

"Its scrip optionality is doubly attractive as the bank pays its dividends in dollars, which allows investors to lock in from both forex and equity volatility," he added.


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