DRP neutralisation

[skc]

I came across this term in several broker reports. They seem to suggest that the said investment bank was in the market to buy X number of shares over Y number of days as part of DRP neutralisation.

Does anyone know what it means, and how are the numbers X and Y determined?

Thanks.

 

[McLovin]

I came across this term in several broker reports. They seem to suggest that the said investment bank was in the market to buy X number of shares over Y number of days as part of DRP neutralisation.

Does anyone know what it means, and how are the numbers X and Y determined?

Thanks.

The company buys back shares on market to "neutralise" the shares that have been issued under the DRP. If you think it seems slightly ****-eyed you are not alone. Put it in the same basket as companies that maintain their dividend while also raising capital.

I assume X is the number of shares to be issued under the DRP. Not sure how Y is calculated.

 

[Ves]

I came across this term in several broker reports. They seem to suggest that the said investment bank was in the market to buy X number of shares over Y number of days as part of DRP neutralisation.

Does anyone know what it means, and how are the numbers X and Y determined?

Thanks.

Without knowing I answer I would assume it has to do with the DRP rules for certain companies (ie. with WOW instos can only access 20,000 shares via the DRP). If their holding was large enough (and they could not access the DRP on most of it) this could effectively "dilute" their % ownership of the company.

 

[skc]

Thanks for the responses...

The company buys back shares on market to "neutralise" the shares that have been issued under the DRP. If you think it seems slightly ****-eyed you are not alone. Put it in the same basket as companies that maintain their dividend while also raising capital.

I assume X is the number of shares to be issued under the DRP. Not sure how Y is calculated.

I know that is the case for one company, but I've also seen another company (SUN) doing neutralisation without a buyback program in place (or the associated ASX releases).

Or perhaps different rules apply for DRP neutralisation buybacks?

Without knowing I answer I would assume it has to do with the DRP rules for certain companies (ie. with WOW instos can only access 20,000 shares via the DRP). If their holding was large enough (and they could not access the DRP on most of it) this could effectively "dilute" their % ownership of the company.

This is a good guess and not something I even thought about... but I have no way of verifying. BTW, your post above re WOW - is that a fact or as illustration only?

 

[McLovin]

Thanks for the responses...

I know that is the case for one company, but I've also seen another company (SUN) doing neutralisation without a buyback program in place (or the associated ASX releases).

Or perhaps different rules apply for DRP neutralisation buybacks?

Hmm...Good point.

Could it be that SUN are acquiring shares on market that are then distributed to shareholders participating in the DRP, whereas other companies will issue new shares under the DRP and then buy-back an equal amount of shares on the market after the fact. So in the first the company is really just buying shares on behalf of shareholders so they avoid brokerage and in the latter they are actually buying back their own shares having created new ones for the DRP. This might explain the differing reporting requirements.

 

[Ves]

This is a good guess and not something I even thought about... but I have no way of verifying. BTW, your post above re WOW - is that a fact or as illustration only?

Check the ASX site. If you search Wow and look at dividends it says drp max @ 20000.

 

[skc]

Hmm...Good point.

Could it be that SUN are acquiring shares on market that are then distributed to shareholders participating in the DRP, whereas other companies will issue new shares under the DRP and then buy-back an equal amount of shares on the market after the fact. So in the first the company is really just buying shares on behalf of shareholders so they avoid brokerage and in the latter they are actually buying back their own shares having created new ones for the DRP. This might explain the differing reporting requirements.

I think you've got it.

This from the CBA

Given the Group's high level of Tier 1 capital, the Directors have decided to remove the previous Dividend Reinvestment Plan discount of 1.5% percent and neutralise or minimise the dilutive effect of the Dividend Reinvestment Plan through an on-market share purchase and transfer to participants.

http://www.commbank.com.au/about-us/shareholders/financial-information/2010-results.aspx

 

[McLovin]

It does make you wonder what the advantage of one method over the other is...