Such shares typically trade on much narrower spreads between buying and selling prices and there is the prospect of a sharp stimulus to the price if the directors announce a capitalisation issue or share split giving holders extra shares at no extra cost.
In theory if a company gives its shareholders a bonus issue on, say, a one- for-one basis, the price of each share should halve and there should be no change in value. In the long run that is what happens. But in the short run the effect can be highly beneficial. The main reason is that companies announcing such capitalisation issues are usually enjoying a purple patch in their trading and the issue is seen as a sign of confidence that business will stay good.
One share that looks interesting because of a forthcoming scrip issue is Bluebird Toys at 818p. The group recently announced a stupendous 6.5 times increase in pre-tax profits to pounds 9.8m, and said it could have done even better if it had been able to meet demand. Fully diluted earnings per share rocketed from 15.4p to 65.2p, net cash doubled to pounds 12.1m and the current year is off to a brilliant start. Analysts' forecasts for profits this year range between pounds 12m and pounds 14.5m but may not mean much since everyone was so wrong-footed by the 1993 performance. Along with the figures, the company has announced a four-for-one share split that will probably take effect on 23 May after the annual general meeting on 19 May. There is a good chance that the shares in ex-scrip form will trade at levels equivalent to significantly more than the present price.
Some scrip issues may also inspire a powerful knee-jerk reaction, perhaps in hope that the lower nominal price will attract new buyers of the shares.
A remarkable example of this was the massive nine-for-one bonus issue announced by the Daily Mail & General Trust (DMGT). When the company announced excellent profits and the proposed issue on 15 December, the voting shares were trading at around pounds 110 in the old form. Immediately before the scrip issue took effect on 17 February the price was pounds 135. Yet on the first day of trading in the new form the price topped pounds 16, equivalent to more than pounds 160. Over a six- month period from last summer the price virtually doubled, helped by the scrip issue.
There could be more to come - partly because DMGT is a superb business poised for strong profit growth over the next few years, but also because the voting shares have now become a very tight market.
Before the issue there were 5 million DMGT voting shares - 75 per cent belonging to the Rothermere family - and 5 million non-voting 'A' shares. Under the terms of the scrip, both voters and non-voters received a bonus issue of nine non-voting A shares. As a result, there are now 95 million non-voting shares and the value of the 5 million with votes has dropped by about 90 per cent.
Because the Rothermeres have unbreakable control, both classes of share have traded at parity in the past. But already the voters at 1,498p have gone to a 20 per cent premium to the A shares at 1,260p. Buyers of the voters are likely to find few sellers, so that premium could widen further. A determined buyer with enough cash could even try to corner the market, with the family unlikely to sell in bulk almost whatever the price.
Also promising are shares in the financial information and multimedia group Reuters, at 2,010p. These boiled over recently after peaking at 2,159p in the wake of brilliant figures, a confident statement on prospects and the announcement of a four-for-one share split due to take effect on 18 April.
The rating looks high at more than 28 on historic 1993 earnings, but in 1995 the group could be making 100p a share, in pre-split form, to drop the p/e to 20. If it manages to hold nearer to 30, that leaves scope for the shares to rise by almost 50 per cent over the next 18 months to two years.
Given what a scrip issue can do for a share price, there is much to be said for placing money where there is a good prospect of a scrip in the future. Opportunities are easy to find because the amazing addiction of UK companies to such issues keeps nominal share prices low.
If the price is high enough to merit a pounds sign, the chances are the company will be foreign. There are not many UK shares valued at more than pounds 10 and these form the shortlist for 'splits' and 'scrips'. The odds are best if the company is enjoying buoyant trading. A cross-section of 'possibles' would include the fund management groups M&G and Perpetual, at 1,019p and 1,085p, respectively; the pressure gauge specialist Druck Holdings at 1,563p; the Daily Mail subsidiary Euromoney at 1,600p; the health-care and pharmaceuticals group Amersham International at 1,090p; Thorn EMI at 1,122p; the business support- services specialist Serco at 1,438p; and Domestic & General, the breakdown insurance concern, at 1950p. These are highly attractive investments in any event, so if the scrips don't happen, the shares should still forge steadily higher.