Scrip Dividends and Share Buy-Back Strategies Based on Volatility

Abstract

The number of listed companies offering alternatives to cash dividends is increasing in Europe. Companies can reduce the cash outflows by giving shareholders the option to receive either shares or cash. Some investors favor scrip dividends due to the implicit free call option attached to the scrip distributions and recent studies confirm that the market does not react negatively, helping to reduce the agency problem. Additionally, companies can avoid dilution by repurchasing the shares offered in the scrip. Repurchase strategies using volatility and derivatives can guarantee a lower repurchase price, improving the capital ratios of the company and increasing Book Value of Equity per Share (BVPS).