Direct Stock Purchase Plans – Why? Why Not?
Direct Stock Purchase Plans (DSPPs) are investment vehicles primarily geared for individuals. They let people become shareholders in a stock for the first time, and steadily build their holdings in that stock inexpensively over time. The plan methodology of a DSPP is the same as for a Dividend Reinvestment Plan (DRiP). The difference between the two is you can become a first-time holder in a stock via a DSPP; and, a DSPP can accommodate dividend reinvestment but it doesn’t promote it as a primary function of the plan – indeed, it is not necessary for a company to even pay a dividend to have a DSPP. (For history buffs, DSPPs came along in 1995 when trade settlement shortened to 3 days from 5, and the SEC saw the value of letting issuers and transfer agents offer book-entry stock directly to shareholders as an alternative to brokerage accounts.)
Why should a company offer a DSPP, and why should someone invest in one? Let’s look at both sides…
Pros
For the Issuer
- Magnet for stock purchases
- Goodwill gesture to shareholders
- Accumulates loyal investors
- Can help proxy voting results
- Can quietly raise equity capital
- Shares can not be shorted
- Plan fees can be largely shareholder-paid
- Directly-registered holders can be directly reached, including to promote the company’s products and services
- More retail holders can counter excessive institutional ownership of the company
For the Shareholder
- Inexpensive way to buy and hold stock
- No intermediary players (broker)
- On-line access to records/trades
- Automatic investments available
- If you are an institutional investor, and the DSPP has a “waiver discount” feature, you can quietly buy shares at a discount
Cons
For the Issuer
- A little more work for Investor Relations
- Some additional company expense
- Non-retail company stocks do not generate as much DSPP demand as retail stocks
For the Shareholder
- Stock prices are not quoted upon trade
- No multiple-stock statements
- Cost-basis calculations more challenging
- DSPPs are not as cheap as they once were; issuers are passing more costs back to plan participants
Net-net: Shareholder Service Solutions® believes the advantages of a DSPP to an issuer and its shareholders far outweigh the plan’s modest costs and challenges. Yes, small shareholders can be a nuisance and yes, retail brokerage accounts are a readily available, alternative vehicle. But when you have a DSPP it says you understand the value of all investors; you understand the value of small shareholder loyalty; you are patient in your acquisition of equity capital; and you are simply smart in availing the company of all avenues of shareholder support.