An 8.7% special dividend sounds great, but there's a catch!

Shareholders in junior listed investment company ECP Emerging Growth Ltd (ASX: ECP) could soon be in line for a healthy special dividend, but there's a significant catch attached.

The company on Friday said it wanted to pay a 10-cent fully-franked special dividend to its shareholders, but only if participation in the company's dividend reinvestment plan (DRP) reached 80%.

The 10-cent special dividend would constitute an extra 8.7% fully-franked yield for shareholders, on top of the company's current yield of 4.84%, according to the ASX website.

How to pay out dividends without depleting cash

Speaking at the company's annual general meeting in November, Chair Murray d'Almeida explained the conundrum facing the company.

He said that one of the issues shareholders regularly brought up was the significant amount of franking credits accrued by the company, and how these could be passed back to shareholders.

As Mr d'Almeida said:

The franking account is accumulated through tax paid by the company and represents value that could be distributed to shareholders by way of dividends. ECP has accumulated a very robust franking balance after multiple years of strong returns, particularly utilising the leveraged portfolio from the convertible note raising. The franking account balance allows the board to maintain our fully franked dividend payments even during periods of lacklustre portfolio performance, however given the market movements over the last few years there has been substantial credits accumulated in excess of normal prudent management.

But, Mr d'Almeida said, the challenge was how to distribute the franking credits without depleting the company's cash balance for investment, "and therefore shrink the size of ECP".

As such, the company has come up with what it says is a "truly unique" approach.

The company on Friday said it would pay out the special dividend, but only if 80% of its shares were enrolled in the company's dividend reinvestment plan (DRP).

As the company said:

The rationale behind the DRP criteria is to ensure the company can continue growing its overall size yet still provide shareholders with access to the franking credits.

Level well short at the moment

The company stated that the DRP participation rate was currently at 36.7%, and it encouraged its shareholders to contact its share registry and sign up in an effort to reach the 80% mark.

ECP added that it would keep its shareholders apprised of progress towards the 80% hurdle when it released its net tangible asset report each month.

ECP shares were steady at $1.14 on Friday, with no trades going through by about noon. The company was valued at $21 million at the close of trade on Thursday.  

The post An 8.7% special dividend sounds great, but there's a catch! appeared first on The Motley Fool Australia.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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