Direct Stock Purchase And Dividend Reinvestment Plans
We Guarantee That Your Company Will Benefit From A Fresh And Careful Re-Look… And Maybe A Major Makeover… And If You Don’t Have One, You Should Take A Look At That Too
While preparing for this issue - with its special focus on “Essential Products and Services” for public companies - we were surprised at how long it’s been since we published an update on Dividend Reinvestment Plans, commonly known - and sometimes, sadly performing - as “DRIPs” - and their slightly more sophisticated cousins, Direct Stock Purchase Plans, or “DSPPs.”
Our last full-blown coverage was way back in 1999, when we responded to companies’ pleas to “Show Us The Money” that was being spent on - and generated by - these products…and how to determine what the ROI actually looked like - in order to decide whether offering such plans was worth the time, the trouble and the money one needs to spend on them.
And wow…times have sure changed since then, in many significant ways. Here are a few excerpts from our 1999 list of money-making results:
- JC Penney compared the buying behaviors of stockholder and non–stockholder credit card holders and found that stockholders visited JC Penney stores more than twice as often and spent 52% more money per visit than non– stockholders, thus spending more than three times as much. (Source: The Shareholder Service Optimizer, Sept/ Oct ’95)
- Real Goods Trading Corp., a company that sells environmentally friendly products via catalog, and that went public over the Internet, found that its stockholders bought twice as much as other buyers. (Source: Wall Street Journal, 6–29–99)
- A major Midwestern financial institution, which, like most of its peers, conducts continuous direct–mail campaigns for gold and platinum cards, car loans, CDs, mortgages and home equity loans, etc., found that its stockholders accepted such offers at three times the rate of non–stockholders. In the expensive direct–mail marketing business, this added “edge” has major financial significance, even before the added benefits of prompter than average payments and much lower than average default rates that arise from having stockholders as customers. (Source: Carl T. Hagberg and Associates)
- Sears Roebuck, which included a broad array of product coupons in its mid–year 1997 report to shareholders, garnered 43,000 redemptions. The profits generated by the incremental sales paid for the entire interim report. (Source: IR Update, Sept. ’97)
- Texaco, which has been cultivating “affinity groups” for as long as we can remember, took two investor surveys in recent years. They found “the correlation between stock ownership and a preference for Texaco products is overwhelmingly positive.” No wonder they have one of the best–marketed and best performing Direct Stock Purchase Plans in the country.
- A study of 500 stockholders who participate in DRP/ DSPP programs, commissioned by First Chicago Trust Co., found that 77% recommend products and services of companies in which they own stock to friends and associates, 47% would use products of the companies they own even if it were more convenient for them to use those of competing companies and 44% would buy where they own stock “even if a competitor offered a better price.” (Source: First Chicago Trust Co. Investor Purchase Behavior Study, Nov. ’97)
Yikes! While we feel sure that JC Penney shareholders still shop their stores as loyally as ever, we truly doubt that JCP has the time to focus on their retail investors as they did back then. And poor Sears, with its mostly poor-looking stores, has become more of a REIT than a retail company, while Texaco has disappeared into Chevron, which is not much of a retail- playeratallnowadays. And, onthe TAscene, First Chicagohas morphed and acquired its way to become DRIP & DSPP Giant Computershare…but where they have indeed continued to sell the benefits of such plans – adding two or three new Plans per month of late…so the scene is far from dormant. (The full text of the article is still available on our website, or at http://www.optimizeronline.com/investorsascustomers.aspx)
Subsequently, in our 3rd Quarter 2012 edition, we published an equally compelling set of arguments, we think, as to the significant economic value of having a robust population of retail investors – and gave “Our Top-Ten Reasons to Grow and to Guard Your Individual Investor Population, which details benefits like raising equity capital at low cost, building brand value, and thus, stock price, lowering volatility…and thus one’s cost of capital, to cite just a few of the ten tips – plus one to grow on.. (This article too is still available at www.optimizeronline.com)
Actually, we think this article has become more important than ever, thanks to three newish factors: the constantly declining levels of retail investor analysts and analysis, that leaves small, mid-cap and even large- cap companies under-reported-on; the very significant stock-price volatility we’ve been seeing of late, that a strong retail base helps to dampen – and last, but far from least, the increasing value of retail investor VOTES in closely contested matters, where individual investors still vote overwhelmingly with management – when they vote at all, that is.
Very important to note when evaluating a DRIP or DSPP, these plans really WORK – IF, that is, they are properly designed, monitored and re-marketed from time to time. As our good friend Chuck Carlson, editor of the DRIP Investor newsletter noted in our 2012 Special Supplement (also on our website), “The combination of long-term investing, systematic dividend reinvestment and no-cost/low-cost investing is a very powerful strategy for wealth creation.” So if properly designed and marketed, a “DRIP” can become a veritable gusher of money for public companies looking to raise equity at low rates, as well as for investors themselves.
But now, for some of the downside aspects of DRIP and DSPP investment plans:
First, they do cost money to run… And yes, while there has been a steady trend toward “shareholder-paid” plans over the past ten years, most companies still have to pay the transfer agents’ “account maintenance fees” – plus most if not all of the out-of-pocket expenses that are incurred for producing and mailing quarterly statements, annual meeting materials and “miscellaneous expenses” which are sometimes surprisingly large.
Secondly – and here’s why a fresh new look is warranted, we say – At many of the companies we look at, the overwhelming majority of Plan participants have a truly negligible amount of money in the stock. (Some agents have done a terrible job of monitoring, enforcing or even having Plan provisions that require accounts to be liquidated when the value drops below some minimum dollar level – or whenever all the full- shares are sold or transferred out. Many agents pay no attention at all when the full shares are sold or transferred to a brokerage account shortly after a record date – and where the dividend ends up buying .001 share – keeping the essentially dead account alive for billing purposes. (We have more than a few of these accounts ourselves, we must confess – simply because the proceeds of sale are not worth all the work involved in getting the agents to sell off the fractional share.)
One last point on the upsides and downsides of DRIPs and DSPPs: While you need to pay a regular dividend to have a true “DRIP” – you do NOT need to do so in order to reap the potentially huge benefits of having a well-designed DSPP.