torata wrote:Please correct me if I'm wrong, but wouldn't I want to take up the rights if I wanted to "maintain" the dividend income amount compared to the previous year. If not, I'm faced with effectively a dividend cut, aren't I? (I know the money raised in the rights issue should generate more income, but that's not guaranteed)
Yes, the company will reduce previous years' comparative dividend figures to reflect the fact that the remaining SMDS holding is only ~93% of the original holding but consists of the same number of shares, with the remaining ~7% having gone into the rights. So they'll count a dividend per share of ~93% of last year's as having been held, a dividend per share that's the same as last year's as being raised by ~7%, etc.
If you "tail swallow" - i.e. sell enough rights to raise the cash to take up the rest and then take them up, you'll come out of this neither up nor down on cash, but with a number of shares that has increased by ~7%. I.e. very much as though the company had done a 93-becomes-100 share split or a 93-produce-7-extra bonus issue.
With other share splits / bonus issues, you would expect the company to adjust the dividend figures accordingly: e.g. if a company does a 1-becomes-2 share split and changes its dividend per share from 10p to 5.5p, you expect the company to say that the previous year's dividend was 5p after adjusting for the share split (i.e. counting each current share as only half an old share and so having got only half of its dividend) and so that the 5.5p dividend is a 10% increase, not a 45% cut. (And if e.g. you had a holding of 1000 shares before and so now have one of 2000 shares, your income from it has indeed increased by 10%, from 1000 * 10p = £100 to 2000 * 5.5p = £110.)
Anyway, the adjustment the company makes to the dividend basically assumes that the shareholder uses one of the methods of coming out of the rights issue with cash neither up nor down, but an increased number of shares, as they would from a bonus issue or share split, and they adjust the dividend accordingly "for the bonus element of the rights issue". An unfortunate phrase, as it's basically a matter of running to stand still - by doing some trading, the shareholder manages to end up neither ahead nor behind on any of cash, expected income or capital value of the holding, apart from some small trading costs and normal stockmarket fluctuations, so in the ordinary sense of the word, there is no more a "bonus" involved for the shareholder in a rights issue than there is in a bonus issue. But that's the stockmarket jargon for it, and as with all well-established jargon, we're stuck with it.
By the way, "tail swallowing" is not the only way to come out of a rights issue with cash unchanged and some more shares - others include selling all the rights and buying more shares with the proceeds, or letting all the rights lapse and buying more shares with the lapsed-rights payment when it arrives. They all involve some buying and/or selling, so the exact effects all depend on whether you happen to get good prices for your buys/sells. As a result, the "bonus element" adjustment will only be exact by sheer luck. For instance, right at the moment the rights are trading at a bit over 140p, so to "tail swallow" you need to sell about 5 rights (raising about £7 after allowing a bit for selling costs) per 2 rights you take up. So you end up taking up about 2/7ths of your rights after selling the other 5/7ths, and since your number of rights is 3/11ths of your number of shares, you end up with extra shares equal to about 2/7 * 3/11 = 6/77ths = ~7.8% of your number of shares. That's a bit above the ~7% figure I've used above, which I got from the £398.28 rights value out of £5,705.78 total in my earlier post, and it's caused by the rights and share prices having risen since the Tuesday opening figures they were based on.
So nothing about this should be treated as exact: the "bonus element" adjustment to the dividend will be roughly right (within a percent or two) but precisely wrong for the vast majority of shareholders!
Edit: Just to clarify a point I noticed just after submitting: my initial "yes" is meant as "yes, if you don't take up any rights and don't buy any shares on the market, your dividend income will be effectively cut". Not "yes, you have to take up all your rights to maintain your dividend income". In fact, the first course of action returns capital to you (either from selling the rights or letting them lapse) but cuts your income, just as selling a bit of a holding that wasn't doing anything special would, and the second enhances your income but absorbs extra capital, just as a top-up purchase of an holding that wasn't doing anything special would. You need an intermediate course of action such as "tail swallowing" to merely maintain (roughly) your income and neither return nor absorb capital.
Gengulphus