Oct 23 (Lagos) - Rights issue is used by Companies to raise Capital while dividend is the return of capital to its shareholders. These are opposite moves but sometimes Companies in Nigeria do this simultaneously so it raises questions of why would a company want to be raising money when it could just stop the dividend payment and keep that money?
A company would do a rights issue and dividend simultaneously to raise capital while also rewarding shareholders and retaining cash. The rights issue provides cash for the company's needs like expansion or debt repayment, while a simultaneous dividend offers a cash payout, rewarding shareholders for their investment.
This is sometimes structured as a "dividend rights issue" where shareholders can choose between receiving a cash dividend or using a discounted right to buy more shares, which gives the company cash while also allowing shareholders to increase their stake.
Retain cash while rewarding shareholders: A company can raise cash through the rights issue for growth or debt reduction, and by offering a simultaneous dividend, it can reward shareholders without having to pay out a large cash dividend that it needs to retain for its own purposes.
Shareholder option: Giving shareholders the choice between a cash dividend and discounted shares via a rights issue allows them to decide whether to increase their ownership in the company or to take a cash payment.
Capital needs: The company can raise capital for purposes like expansion, acquisitions, or to pay off debt.
Signal confidence: By continuing a dividend payment while also issuing new shares, a company can signal that it is confident in its future prospects and growth plans, even as it needs to raise additional capital.