Friday, September 10, 2010

Split Bonus and Gains

It is surprising but yet it is true, divide a corporate pie into different slices and the sum of these slices will be larger than the original. Yes, we are talking about the corporate actions such as split and bonus announced by the company, wherein the number of shares increases in the hands of existing shareholders though their proportionate ownership remains unchanged. In theory, these actions should not leave the share-holders any better than pre-announcements of these corporate actions. But it has been observed that in most of the cases there is an increase in the investor’s wealth after these announcements. Now let us check how these actions by the company have made the investors wealthier. Before arriving at any conclusion, we analysed data of all such split and bonus announced by the companies, since the start of year 2009.
SplitStock split is a process under which high face value shares are split into lower face value shares. Some of the popular way of splitting shares is splitting share of Face Value Rs 10 each to Rs 1 Rs 10 to Rs 2 (10:2), etc. In total of 78 splits announcements made since January 1, 2009, the most common split was 10:1; almost 50 per cent or 37 companies announced splits in this ratio, followed by 10:2, which was announced by 23 companies. If we consider the performance of these companies post-announcement, we find that out of total 78 companies, there are 61 companies whose scrips are trading above the price prevailing on the date of announcement of split in shares.
BonusBonus issue that is also known as stock dividend in many parts of the world is nothing but capitalization of reserves. The shareholders receive additional shares on the proportionate basis of the original holding but the ownership remains unchanged. Earlier, it was believed that a company announces bonus issue only if it is confident of maintaining the dividend rates. This would have been received positively in the market about the company’s performance and hence prices would increase. Other logic was that bonus issue would increase the float of stocks and hence the liquidity of the shares. Since the start of January 2009 there were 51 companies, which have rewarded their shareholders by issuing bonus shares. There is no particular ratio in which companies issue bonus shares, it all depends upon the existing outstanding shares and the reserves a company has.
Split Plus BonusNow there are certain companies who have announced both split and bonus and it seems that average stock returns of these companies have beaten the returns of the companies in earlier two categories, that is split and bonus. There are altogether 17 companies that have announced both split and bonus since the start of January 2009. Out of these, 13 companies are quoting above the price on the date of announcement. The median returns of these companies are 49 per cent, well above the median market return of 17 per cent for the same period. For example, one of the highest returns is given by the Avance Technologies, which announced bonus issue in the ratio of 4:1 and split their shares in the ratio of 10:1. After adjusting for the prices for the bonus and split the stock return is an astounding 776 per cent.
Invest with CautionFrom the above discussion it seems that investing in companies, which have announced a bonus and split makes sense since these companies offered returns better than the market returns, but there are certain caveats.
In case of splits, it has been observed that it is primarily momentum stocks that announce split and hence one needs to be vigilant while picking these shares because one might find getting caught on the wrong side of the price movement and may lose money. For example, Austral Coke & Projects, one of the momentum stocks, which announced split in the ratio of 10:1, has given negative return of 70 per cent since the date of announcement of splits.

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