In the past weeks, several local companies announced that they are distributing stock dividends. Interestingly, all four are issuing stock dividends as a way of raising their company’s capital stock.
Check out the following news excerpts of the dividend announcements.
DMCI Holdings: 400% stock dividend
DMCI Holdings (stock code: DMC) announced on May 5 that it is increasing its authorized capital stock and the way to do this is through stock dividend distribution. DMC plans to raise its capital stock from P6 billion (divided into 5.9 billion common shares and 100 million preferred shares, with P1 par value each) to P20 billion (divided into 19.9 billion common shares and 100 million preferred shares, both with a par value of P1.00 per share). The DMC Board of Directors declared a 400% stock dividend, which translates to 4 common shares for every one common share held. The record and payment dates are yet to be announced.
Pancake House: 100% stock dividend
Pancake House Inc. (stock code: PCKH) is also set to increase the company’s capital stock from P400 million to P1.4 billion. Like DMC, the capital increase will be achieved by way of stock dividends. No word yet on the record date or ex-dividend date, but eligible stockholders will receive a 100% stock dividend. This amounts to 259.21 million new common shares with a P1 par value each.
Chinabank: 8% stock dividend
Stockholders of China Bank (stock code: CHIB) approved on May 8 the declaration of a 10% cash dividend or P1.00 per share for a total of P1.59 billion. In addition, it will distribute an 8% stock dividend. The stockholders also approved the increase in the Bank’s authorized capital stock from P20 billion to P25 billion. The stock dividend will cover the minimum subscription and paid in capital requirement arising from the increase in authorized capital stock.
Megawide Construction Corp.: 45.5% stock dividend
On May 14, the Board of Directors of Megawide Construction Corp. (MWIDE) approved the declaration of 750 million common shares stock dividend, with a par value of P1.00, totaling P750 million to be taken from the unrestricted retained earnings of MWIDE as of December 31, 2013. The stock dividend declaration will be submitted for approval by the stockholders in its Annual Stockholders’ Meeting on June 30, 2014 and the record and payment dates will be announced afterwards.
What are Stock Dividends?
A stock dividend is a distribution of a company’s income to shareholders in the form of additional shares of stocks. Unlike in a cash dividend distribution, shareholders do not receive actual cash, instead, they receive additional shares of the company either from previously unissued stocks or from an increase in the company’s authorized capital stock.
Stock dividends are usually announced in percentage form, and the percentage represents the number of shares the stockholder is entitled to receive. For example, In the case of Pancake House (PCKH) which announced a 100% stock dividend, a shareholder owning 10,000 PCKH shares will receive an additional 10,000 shares — totaling 20,000 PCKH shares all in all after the distribution.
As for Megawide Construction Corp. (MWIDE), the 45.5% stock dividend distribution means that if you originally have 100,000 shares of MWIDE, you are entitled to receive 45,500 shares more.
Stock Dividends — good or bad?
Some shareholders view stock dividends favorably because they get to receive their share in the company’s income. Technically, the stock dividends are not consumable earnings yet but stockholders can instantly sell these shares in the stock market and convert them to cash.
In addition, shareholders hope that, because stocks were issued instead of cash dividends, cash that is retained in the company is reinvested into the business, producing more profits and further maximizing shareholder value in the long run.
Those opposed to the idea of stock dividends, on the other hand, argue that at the time of distribution, there really is no income given to shareholders since stock prices typically decline to compensate for additional shares issued. Declaration of stock dividends do not affect the company’s market capitalization, thus, when more shares become available, the stock price will have to fall.
Stock Dividend issuance and stock price dilution
To illustrate the dilution in stock price, assume that a company has 1 million shares outstanding trading at P10 each. Its total market capitalization (computed as stock price times number of shares outstanding) is P10 million. If the company distributed 5% stock dividend, a total of 50,000 new shares will be issued. After the distribution, the company will have a total of 1.05 million outstanding shares.
Since there is no change in capitalization (still P10 million), the stock price will have to fall in order to compensate for the additional shares in the market. Its new stock price can be computed as follows:
Market capitalization / Total number of shares = New stock price after stock dividend distribution
In the case of our example:
P10 million / 1.05 million shares = Adjusted stock price of P9.52 per share
As can be seen in the computation, the issuance of stock dividends will cause an instant dilution of stock price from P10 to P9.52.
Regardless whether an investor views stock dividends as positive (distribution of share of income) or negative (causing price dilution), the real benefit of stock dividends can only be felt at a later time, once stock prices have appreciated and shareholders can now sell those additional stocks received at much higher prices.
Must read these other awesome, educational posts!
- Impact of Philex (PX) stock dividend: Huge price drop!
- Cash and Stock Dividends Update, 1st Quarter 2014
- All about Dividends in stock investing
- Distribution of Property Dividends
- Top Dividend Paying Stocks in the PSE