A scrip issue is one of a number of 'corporate actions'. This rather grand term refers to various things that companies can do which affect the number of shares in issue.
Any increase in the number of shares has the potential to dilute earnings per share and the dividend paid per share, but a scrip issue is different. It certainly increases the number of shares, but does so without diluting the overall dividend entitlement of shareholders.
The reason for scrip issues is all to do with shareholder psychology. When a share price gets above the £10 mark, it is generally reckoned to put off small investors. For whatever reason, people prefer to buy 1,000 shares trading at £1 than 100 shares trading at £10.
In order to improve marketability, companies have a scrip issue. They issue the owner of the 100 shares with 900 new shares. He now owns 1,000 shares. The market acknowledges the increased number of shares by marking the share price of each down to £1 or thereabouts.
Each new share will earn one tenth of the dividend of the old shares, but overall the shareholder will get the same income as before. There has been no dilution of his holding in real terms. In effect, his cake has been cut into smaller bits, but the amount on his plate is the same.
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