Oran Hall | Bonus share issue versus a stock split
Commendations on your advisory column, particularly that of Sunday, June 26, 2016. That was an excellent article! However, I'm getting conflicting advice on the bonus stock split. Kindly advise on the results of such an action by a company.
A bonus issue of shares and a stock split are two different things. Both result in the investor owning more shares and in ratios computed on a per share basis changing.
A bonus issue of shares is a distribution the company makes to shareholders. In fact, it is also called a stock dividend. A stock split is not a distribution.
All shareholders on the share register of the company on the record date of either issue are eligible for the stock split and the bonus shares. They are not renounceable.
A stock split brings about a change in the amount of shares due to a change in the par value of the shares. If, for example, you are the owner of 100 shares in company 'X' with a par value of $1 per share and there is a four-for-one split, you would end up owning 400 shares having a par value of $0.25 each. It does not interfere with the balance sheet beyond that.
If instead of a stock split there is a four-for-one bonus issue of shares, you would receive four additional shares for each share you currently own. Thus, you would own 500 shares 100 old plus 400 new. But there would be no change in the par value of the shares; you would still own shares having a par value of $1.
In neither case would you pay for the additional shares.
In the case of the bonus, you are effectively receiving new shares due to a reduction of another element of shareholders' equity: retained earnings or the accumulated profits. So the share capital portion of the balance sheet increases, but the retained earnings portion decreases so there is no change in shareholders' equity.
In other words, the value of the shareholders' funds is not disturbed, although there is a fivefold increase in the shares owned by the shareholders.
Neither a bonus nor a stock split yields any money to the issuing company nor causes the company to pay money to shareholders. Shareholders, on the other hand, come into possession of shares they did not have before, but to sell any would make them own a smaller portion of the company than before. Selling would not likely yield a windfall considering the price adjustments that the new shares would make necessary in each case.
REDUCTION IN EARNINGS
The increase in the issued ordinary stock units of the company in each case would cause a reduction in earnings per share and the dividends per ordinary stock unit. In the cases we are considering today a four-for-one bonus and a four-for-one stock split as the bonus would cause more shares to be in issue than the stock split, it would have a more marked impact on the price, dividends, and earnings per share. Bonus issues of that magnitude, though, are not common.
Both a stock split and a bonus issue of shares increase the liquidity of the stock due to the increase in the number of shares and their lower nominal price, and there are other similarities. But they are different.
I appreciate your words of commendation.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org