29 January 2014

Understanding Corporate Action - Stock Split / Consolidation / Rights Issues / Bonus shares

It is quite common for a listed company to perform a corporate action to fulfill certain requirements set by themselves or their creditors. The ability to perform corporate action is also part of the reasons why a company want to be get listed in stock exchange. Let us examine several corporate action here:
  1. Rights Issues / Private Placement - If the company which have a big project and would require a certain amount of capital outlay, they could actually raise up the capital through rights issues / private placement. It means that they would raise up the fund through expanding number of total outstanding shares and hence would dilute the EPS in near term. It is quite common in Oil & Gas sector, as some of the companies would raise up the fund easier to grab the opportunities out there. It is understood that majority of the rigs are in the end of its cycle and it's time for companies to build the new rigs with safer and more efficient capabilities. If the issue price is above book price, the balance between issue price and book price would be recorded under Shares Premium in Shareholder Equity and could not be distributed out as dividend to shareholders under the accounting standard. 
  2. Stock Split - Some companies would like to see their shares price in certain price range. Once the company performed well and the share price surged to a record high, a few company would propose to a stock split and it would certainly increase the number of outstanding shares as well as decrease the EPS and shares price. However this corporate action would not dilute anything. It just give an illusion that the shareholders would enjoy more number of outstanding shares they own, while the value of their holdings is still the same.
  3. Bonus Shares - Similar to stock split, a Bonus Shares means that the corporate issues out new shares from the retain earnings. The number of outstanding shares would increase and EPS would be decreased but the value of shareholdings is unchanged.
  4. Consolidation - As contrast to Stock Split, the company would consolidate the outstanding shares to a small amount main duly to the effort to increase the share prices. It sometime is performed by penny stocks so that the share price could be increased to above 10 cents to attract investors who prefer a higher price range. Other than that, it is not an unusual move after companies which raise up rights issue to also propose a stock consolidation. 
Among all the corporate action mentioned above, the only one that would dilute EPS is Rights Issues / Private Placement. So, we should put more efforts in examining the effect of EPS after the proposal of company. It is not a good idea if the purpose is to repay debts, but it maybe a good idea if it is used for expanding the business such as for working capital purpose or grabbing more business opportunities out there. 

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