Telstra Corporation Ltd (ASX: TLS) announced its profit results for the half-year ended 31 December 2014 this morning, posting a record profit and a 15 cent per share (fully franked) dividend. However, the part of the report that is gaining perhaps the most attention is its decision to reactivate its Dividend Reinvestment Plan (DRP) for the first time since 2008.
While you can read a detailed review of the company's overall performance here, this section will focus specifically on Telstra's DRP. A plan some investors have been eagerly waiting for.
What is a DRP?
A DRP gives shareholders of a company the option to receive their dividends in the form of more shares, as opposed to a cash payment. Shareholders can choose to participate in full or in part (that is, receive a portion of dividends in new shares and a portion in cash), or not at all.
While there are many factors to consider, participation in a DRP should reflect an investor's confidence that the company offering the DRP can generate strong future growth. While the shares the investor receives under the DRP are still taxable, they incur no brokerage or transaction fees in receiving the new shares.
Many ASX companies offer DRPs, including Coca-Cola Amatil Ltd (ASX: CCL), Woolworths Limited (ASX: WOW) and Origin Energy Ltd (ASX: ORG).
Telstra's DRP – what you need to know
At Telstra's annual general meeting last year, retail investors called for the reactivation of the company's DRP in order to reinvest more money back into the company. Telstra obliged with CEO David Thodey saying: "We expect our decision to reactivate the DRP will be welcomed by many of our shareholders and give them an easy and cost effective way to increase their shareholding."
While many companies implement a DRP as a way to decrease their cash outlays in the form of dividends (choosing to issue new shares instead, essentially diluting shareholder ownership), Telstra said the shares allocated to participants of the DRP would be sourced through an on-market purchase with the shares then being transferred to shareholders. That is, no new share capital will be issued and no discount will apply to the shares.
The DRP will be available from the Financial Year 2015 final dividend, meaning investors who wish to participate will need to lodge their preference to do so by no later than 28 August 2015.
Advantages
Here are some advantages to participating in the DRP:
- Shareholders can increase their stake in Telstra without incurring brokerage costs
- There is a compounding effect – new shares received in the DRP can then also participate in the DRP, earning even greater exposure to the stock
Disadvantages
There are also a number of disadvantages in participating:
- Shareholders have no say at which price they receive the new stock
- The shares issued under the DRP are not discounted
- Many analysts believe Telstra is fully valued. Shareholders who participate in the DRP may effectively be overpaying for their new stock
The Verdict
At Telstra's current price, it seems that the disadvantages outweigh the advantages to participating in the DRP. While many investors will be content with increasing their stake in Telstra thanks to its safety and reliable dividend, others will recognise that by participating in the DRP, they may be restricting themselves from potentially greater investment opportunities.
