Published on Monday 31st October, 2005 by Celtic Trust
There does appear to be quite a bit of confusion regarding the origins of the Scrip Dividend Re-investment scheme; and more importantly, about how you actually go about joining it. More importantly I would like to correct the misconception that the introduction of the Scrip Dividend Investment Scheme is somehow bad for Celtic. The Celtic Trust are assured that a small profit was made after start-up costs, and we believe, on the basis of the figures below, that in future years this has the potential to generate significant additional investment for Celtic as more shareholders join the scheme.
A Dividend Re-investment Scheme operates on the principle that shareholders who are entitled to receive dividends may opt to receive shares in the company instead of cash (though they pay income tax in the normal way). There are two main types of Dividend Re-investment Scheme; a DRIP Scheme and a Scrip scheme. The scheme recommended by the Celtic Trust, and the one ultimately adopted by Celtic, is the Scrip scheme. In a Scrip Dividend Re-investment Scheme new shares are issued by the company, resulting in a gradual increase in the issued share capital as new equity finance is brought into the company. So a Scrip Dividend Re-investment Scheme gives shareholders the opportunity to re-invest their dividends (after income tax has been paid) in new Celtic Plc shares rather than taking them out as cash, whilst also putting new money back into the club for re-investment in the playing squad. Critically, such a scheme increases the manager’s spending power whilst not increasing debt and endangering the long-term financial health of the club. Scrip dividend schemes are operated at many well-known companies, for example at Royal Bank of Scotland.
There are three classes of shares in Celtic Plc. These are: 1995 issue Ordinary shares (voting shares but pay no dividend at present, but if Celtic were ever to become profitable they could do). Preference shares (non-voting shares which pay a dividend of 3.24p per share – these can be converted to ordinary shares at any time by writing to Celtic’s Company Secretary but conversion cancels the dividend). 2001 issue Convertible preferred ordinary shares (voting shares which also pay a dividend of 5p per share). The amounts of money paid out by Celtic Plc in dividends are significant: 2003/2004 – £3,050,000 2004/2005 - £1,445,050 (See page 35 of the 2004/2005 Celtic Plc Annual Report - £900,622 of this is paid to the holders of the Convertible preferred ordinary shares issued in 2001). The Celtic Trust believes as a matter of principle that in an ideal world no dividends would be paid out by Celtic and all revenues would go towards the strengthening of the team. We believe that Celtic is about glory and not profit. However, as Celtic have a legal obligation to distribute the above dividends due to commitments previously made then a more creative way needed to be found to re-direct this expenditure to the playing squad – that way was via the introduction of a Scrip Dividend Re-investment Scheme. All Celtic shareholders are taxed at source on their dividends at the rate of 10%, thus reducing the pool of money available for re-investment in the club. And of course Dermot Desmond, holder of just under 29% of the voting shares in Celtic may not wish to participate in the scheme as this would take him over the 30% level above which he would have to make an unconditional offer for all the rest of the shares in the club. However, there is nothing to stop all the other shareholders in Celtic Plc taking part in the scheme. Let’s say for the sake of argument that shareholders representing shares accounting for 50% of the dividend payable had joined the scheme: the total amount of money coming back into Celtic would have been £722,525 before tax to spend on the playing squad. While this would not solve Celtic’s financial problems, it would certainly make a small positive contribution – it’s not small change. But more to the point, the establishment of a Scrip Dividend Re-investment Scheme offers all shareholders, large and small, the opportunity to show that their investment in Celtic is `emotional’ and not just financial, by putting their dividend entitlement back into the club. By doing so they would be demonstrating that for them their investment in Celtic was about glory not profit. At the Celtic Plc AGM on Wednesday 13 October 2004 the debate around the Trust’s two resolutions dominated discussions. The Board of Celtic Plc called on shareholders to oppose the Scrip Dividend Re-investment Scheme on the grounds that `The company will [need to] investigate possible schemes in greater depth to establish which, if any, would be of potential benefit to the Company and its shareholders and worthy of recommendation…’ (see page 47 of the 2003/2004 Annual Report). Both the Trust’s resolutions were comfortably defeated by a combination of major individual shareholders voting against the resolutions and the vast majority of shareholders not casting their vote. Though it should be noted that the vote for the resolution calling for the appointment of a supporter-director was three times the number of shares cast when the resolution was first raised at the 2001 AGM. However, by raising the resolutions the Trust enabled these two key issues of supporter concern, in particular the need to put strengthening of the playing squad ahead of personal profit, to remain at the top of the Plc Board’s agenda. Subsequent to the AGM Trust representatives met with Celtic Plc Chief Executive Peter Lawwell for regular quarterly meetings to discuss the practicalities of implementing a Scrip Dividend Re-Investment Scheme at Celtic. Having examined the merits Celtic were won over, and in June last they called a special Extraordinary General Meeting (EGM) seeking approval to introduce the scheme. Every Celtic shareholder received a copy of the documentation explaining how the scheme would operate. This documentation was presented in the usual dense format typical of such publications across UK companies. It is fair to say that it was not particularly easy to understand, but in this respect it is not much different from the norm in this regard across British companies. A vote taken at the EGM on the 21st July approved the introduction of the scheme.
In the 2004/2005 Annual Report (pages 9 and 11) Celtic announced that `the dividend re-investment scheme will…result in the cash paid out in dividends reducing by about £40,000’. The following quantities of shares ‘joined’ the scheme: 1995 share issue 703, 908 preference shares (dividend-bearing non voting shares) 1,316,637 ordinary shares (voting, currently non-dividend bearing shares) 2001 share issue 338,940 convertible preferred ordinary shares converted (voting, dividend-bearing shares).
The only costs to Celtic from establishing a Scrip Dividend Re-investment Scheme were the costs of getting the relevant legal advice for a scheme which is the same basic standard as implemented by many companies across Britain including the Royal Bank of Scotland, plus the cost of printing and posting the relevant papers for the EGM, holding the EGM, and finally administering the scheme. Most of the costs of the scheme are incurred up front in the first year of its establishment. So in future years, all the monies re-invested in Celtic will go direct to the bottom line. So in financial terms the introduction of the scheme is clearly a minor financial success.
If one assumes that the average shareholder who opted to enter the Scrip Dividend Re-investment Scheme held around 1,000 of the various classes of shares then we can say that around 2,000 individual shareholders decided to take part. This is around the figure that the Celtic Trust estimates actually vote their shares at each Celtic Plc AGM. It is here that we get to the nub of the problem of why more Celtic shareholders did not take the opportunity to join the Scrip Dividend Re-investment Scheme. Reading the various posts on the issue on CelticQuickNews it is clear that the vast majority of Celtic shareholders either: Take no interest in any correspondence relating to their shareholding in Celtic. Have difficulty in following and understanding the densely written `legalese’ which is the core material in most shareholder correspondence. The key question is, how can these twin barriers be overcome? The Celtic Trust has sought to address these problems by trying to communicate to small shareholders the potential power they can exercise by voting at the company AGM. In fact if they all voted the small shareholders would be a power in the land. In this regard we are calling on all Celtic shareholders to back our two resolutions for this year’s PLC AGM, details of which can be found in your AGM material sent out by Celtic or by following the link on the Home Page of this site.
The Celtic Trust has asked for a definitive response from Computershare and the situation is as follows: every year, approximately six or seven weeks prior to the dividend being paid (which will be some time in July), every shareholder will receive a form which will allow them to notify their intention to join the scheme. So there you have it. All you need to do is read what is sent to you and fill in the form and post it off and you will forgo your dividend in return for more shares!