Impact of PX stock dividend: Huge price drop!
March 4, 2008
Early this morning, I panicked after logging on to my BPITrade online trading account because one of my holdings, Philex Mining Corporation (Stock Code: PX) was trading at P7.50 per share.
You can’t blame me. Only yesterday, the stock was trading at P9.40 and a P7.50 market price means a steep one-day decline of 20% (read: f*ck! I’m losing a lot of money in just one day!).
My PX shares at P8.80
At P7.50, I stand to lose money because I originally bought PX shares at P8.80.
I scoured local news websites for any update on what caused Philex’s price to drop. I found nothing. Is this the end of my trading account? Should I just accept the fact that I lost a lot of money in this stock?
30% stock dividends
Fortunately, I chanced upon a site that mentioned that today, March 4, is the ex-dividend date (or ex-date) of PX. Let me backtrack a bit.
I know that last month, PX announced that they are distributing 30% stock dividends to all common stockholders. I know that stock dividends are distributions of a company’s profit to stockholders in the form of additional shares of stocks. This means as a PX shareholder, I will receive 30% more shares free of charge.
What I didn’t know, however, is that the price adjustment resulting from the stock dividends is going to happen today.
Why was there a price adjustment in the first place?
Market capitalization = Market price x Number of shares
Well, we need to understand the concept of market capitalization. Market capitalization measures the economic size of a company by multiplying two figures — the current market price of the stock and the total number of shares outstanding.
Yesterday, PX closed at P9.40 per share and with more than 3 billion shares outstanding, its market capitalization stands at P28.2 billion (P9.40 * 3 billion shares).
30% stock dividend = 30% more shares
On February 21, PX declared a 30% stock dividend payable on April 4, with ex-date on March 4. A 30% stock dividend effectively increases the total number of shares by 30%.
Initially, PX has 3 billion shares outstanding. Because of the 30% stock dividend, it will now have 3.9 billion shares. Consequently, all PX shareholders will receive additional 30% shares for free.
Stock dividends do not affect market capitalization
An important point about stock dividends is that they DO NOT affect market capitalization in any way.
Remember that PX’s market capitalization is P28.2 billion. Previously, 3 billion shares were outstanding which means each share’s price was P9.40 (P28.2 B / 3 billion shares).
But now that 3.9 billion shares are outstanding, the market price has to decrease in order to adjust with the increase in number of shares.
Thus, the same market capitalization of P28.2 billion divided by 3.9 billion shares currently outstanding will yield a lower price per share of P7.30.
Adjusted PX price is P7.30
That is, after considering stock dividends, the market price of PX should be P7.30.
Wait, didn’t PX close today at P7.50? That means I actually gained a profit! Hooray!
Did I lose money? No. Because the additional 30% shares that I will be receiving will compensate for the drop in share price.
Whew! It does pay to listen to your Finance or Investments classes once in a while.
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