Thursday, January 8, 2009

BMO Adds a Discount on Reinvested Dividends

On Monday, Bank of Montreal announced that they would start offering a 2% discount on reinvested dividends, starting with their next dividend payment at the end of February.

Since BMO is one of the companies that I own in my DRiP portfolio, I will be benefitting from that discount. But what does it means when a company offers such a discount? What are the implications?

Well, it is fairly simple. When a company annouces such a discount, it is usually because it is a low-cost way for them to issue new shares to raise more capital. If you read the annoucement linked above, you may notice the part of the text where it says "the Bank has decided to issue shares from treasury". Issuing share from treasury is simply another way to say that they are creating new shares.

Although companies cannot raise a lot of capital this way, it is just one more way for them to do so. Bank of Montreal, for example, has in the last couple of months announced that they were issuing common shares, preferred shares and notes (debt) to raise more capital (and thus prop up their balance sheet). Combined, these issues allowed it to raise 1.6 G$.

So the discount on reinvested dividends is not a surprise, although this is just a drop in the overall issuance bucket.

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