Here's an example and what is scrip dividend scheme?

The link below will lead you to OCBC's financial summary for the past 10 years.
This is a good example where we see growth in the past 10 years.

http://www.ocbc.com.sg/global/investorrelations/Gco_Inv_10yrHistory.shtm?bcid=M4_C1_S3

Let's take a look at EPS of OCBC.

In 1999, OCBC has EPS of $0.233. It has been going on an uptrend till 2007, with an EPS of $0.659.
In 2008, OCBC has EPS of $0.546 only because of the global financial meltdown in that year.

From 1999 till 2007, the earnings growth rate is 12% per annum compounded.
Let's use $0.546 (EPS in 2008) and use rate of 12% per annum to estimate the EPS of OCBC in 5 years time.
In 2014, OCBC is expected to have EPS of $0.96.
Multiplying by a future P/E of 10, the stock price of OCBC should be $9.60 in 2014.
Multiplying by a future P/E of 12, the stock price of OCBC should be $11.52 in 2014.
Multiplying by a future P/E of 15, the stock price of OCBC should be $14.40 in 2014.

But what is the price that we should buy now? Nobody can give you the answer.
Using the future price of $14.40, I will do these calculations. (This is the most optimistic.)
Assuming that I expect a return of 15% annally, then I would buy OCBC shares at $7.16.
But if I expect a return of 12% annually, then I would buy OCBC shares at $8.17.
For a return of 10% annually, then I would buy OCBC shares at $8.90.

Remember, the returns are actually compounded annually.
Therefore, the lower the price we pay for the shares, the higher the returns.

Another good practice by OCBC is their scrip dividend scheme. What is this scrip dividend scheme?
In this scheme, shareholders can ask to convert their cash dividends into OCBC ordinary shares at a certain price, the price will be determined by averaging the market price for a number of days.
So what is so good about it?

Well, let's look at this example where James bought 1000 OCBC shares at $8.20 each.
(Note: This is just an example, the figures shown below may not be accurate.)
In 2008, OCBC gives a $0.14 dividend ($140 for James) in August and another $0.14 dividend ($140 for James) in February 2009. If he chose to take out as cash, then he will have $280.

Now, let's see what happens if James chose to convert his dividend into OCBC shares.
In August 2008, conversion price was $7.80. (James will have about 18 shares of OCBC)
In February 2009, conversion price was $4.80. (James will have about 29 shares of OCBC)
In total, James had 1047 OCBC shares in March 2009.
The extra 47 OCBC shares are worth ($8.60 x 47) $404.20 now, compared to the $280 if he were to take the cash dividend.
What's more, in August 2009, OCBC gives another $0.14 of dividend. Hence, James' dividend in August 2009 is ($0.14 x 1047) $146.58, instead of only $140.
If he continues to convert his dividend into ordinary shares, can you imagine how much will his initial investment of $8,200 will become in 2019?
You can try to estimate on your own.


Disclaimer: This article is just for reference only. It should not be used to instigate a buy or sell of the company's shares.