Does bonus issue & share split matter for investors? – myths and realities🎁💹
Recently, market has been abuzz with announcements of bonus issue/split share from many co's such as Tata steel, Varun beverages, Hindustan Foods, AU small finance bank
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Recently, market has been abuzz with announcements of bonus issue/split share from many co's such as Tata steel, Varun beverages, Hindustan Foods, AU small finance bank
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multipie.co
Let’s briefly understand what happens when a company announces a bonus issue/split share:
In Bonus issue, additional shares are provided to the existing shareholders at the 0 cost in the specified ratio by the co. & the share price also declines in this same proportion.
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In Bonus issue, additional shares are provided to the existing shareholders at the 0 cost in the specified ratio by the co. & the share price also declines in this same proportion.
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When a Split share happens, the existing number of shares are split into more equity shares according to the specified ratio decided by the company and this leads to a decrease in the share price.
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Varun beverages share price surged 4% after the bonus issue announcement & This happens all the time🤷♀️that shareholders get excited on the bonus news
One such e.g is IEX when in Oct’21 it announced bonus shares & the price increased by 20%
Many investors believe this:
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One such e.g is IEX when in Oct’21 it announced bonus shares & the price increased by 20%
Many investors believe this:
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Meanwhile, Rakesh Jhunjhunwala a significant minority shareholder in Titan has started pushing the management – says it’s time the company considered a bonus share issue.
Causing a debate on Twitter.
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Causing a debate on Twitter.
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Some common myths in the market:
1. Does the bonus increase EPS & ROE? No.
EPS gets diluted but as the % held of the company remains the same, ROE also remains the same.
2. The only benefit from the bonus is that the price gets affordable & stock gets the liquidity? No.
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1. Does the bonus increase EPS & ROE? No.
EPS gets diluted but as the % held of the company remains the same, ROE also remains the same.
2. The only benefit from the bonus is that the price gets affordable & stock gets the liquidity? No.
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3. Dividends don’t increase with the hike in no. of shares?
No, the majority of time it does, because mngmnt usually keeps same dividend/share, as otherwise, it would hurt their reputation
As now most of myths are busted, Let’s decode how these issues reward shareholders:
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No, the majority of time it does, because mngmnt usually keeps same dividend/share, as otherwise, it would hurt their reputation
As now most of myths are busted, Let’s decode how these issues reward shareholders:
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1. Through dividend income: (which the majority of us ignore) even though share price falls, usually, dividend/share remains the same or doesn’t fall in the same proportion as price, due to which shareholders benefit more from the dividend income on a higher no. of shares
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Example:
(i) HCL technologies Ltd tendered bonus shares in December 2019 in the ratio of 1:1 (number of shares doubled from 135.6crs in sept’19 to 271.3crs in dec’19) but dividend per share in 2020 remained the same as in 2019
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(i) HCL technologies Ltd tendered bonus shares in December 2019 in the ratio of 1:1 (number of shares doubled from 135.6crs in sept’19 to 271.3crs in dec’19) but dividend per share in 2020 remained the same as in 2019
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As we can see, the shareholders who got the bonus shares in FY19 would have earned Rs16 dividend/share in FY20 & if would have held the stock till now, dividend income alone would have been Rs140 which is double than of shareholders who didn’t receive bonus shares
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2. From increase in M.Cap of co:
After bonus/split, share price seems cheaper on absolute terms & large no. of retail investors are able to buy the stock
Higher demand for stock, again, ultimately (immediately at times) leads to higher price, increasing the M.Cap of co.
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After bonus/split, share price seems cheaper on absolute terms & large no. of retail investors are able to buy the stock
Higher demand for stock, again, ultimately (immediately at times) leads to higher price, increasing the M.Cap of co.
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Example:
(i) HCL technologies: Market capitalization increased from 1.41 lakh crs to 1.51 lakh crs immediately after the bonus shares were tendered.
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(i) HCL technologies: Market capitalization increased from 1.41 lakh crs to 1.51 lakh crs immediately after the bonus shares were tendered.
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3. Bonus stripping: Many wealth managers used to do bonus stripping to save taxes as it helped in saving 20% tax by booking short-term losses against long term gains
This strategy is no more often used after LTCG is taxed at 10%, so the tax benefit has been reduced by 10%
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This strategy is no more often used after LTCG is taxed at 10%, so the tax benefit has been reduced by 10%
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Bottom line: On face of it, it seems like the bonus/split issue has no value but eventually investor is rewarded as it is not a zero-sum game
Rarely does someone talk about this on social media as people who understand & implement this psychology game, usually stay quiet?
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Rarely does someone talk about this on social media as people who understand & implement this psychology game, usually stay quiet?
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We also explained the case study of Eicher Motors in our latest #Multipieweekly that how investors whose shares got split in Aug'20 benefited more from dividend income as well as from increase in market capitalization.
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