View from City Road: Foreign way to scrap the scrip

Companies still toying with enhanced scrip dividends may learn from BAT Industries, which plans to convert its 1993 final dividend to a foreign income dividend.

FIDs are designed to help companies relieve the problem of surplus Advance Corporation Tax. If they can prove dividends are paid from taxed foreign earnings, they need not pay the 25 per cent ACT.

The quid pro quo is that tax- exempt shareholders cannot reclaim the tax credit. So BAT is compensating them - and offering a windfall to taxpaying investors - by lifting its 1993 final dividend 25 per cent to 15.25p and promising a boost of up to 10 per cent to earnings per share.

The scheme is available to any company with surplus ACT. But they have to have enough foreign earnings to cover the dividend and, more importantly, the funds available to offer shareholders an incentive to accept it.

Enhanced scrips, which are paid in shares, not hard cash, have no such drawbacks. But this is why they are not universally popular with shareholders.