If you’re holding Nickel Asia (NIKL) stocks and you’re not updated on what was to happen yesterday, July 13, 2015, you would have panicked upon seeing that the NIKL stock opened at P10.00 from its closing price of P20.00 on Friday.
So the stock closed at P20.00 last Friday and, yesterday, Monday, the stock was trading at P10.00? That’s a huge loss!
Well, not really. That’s just the impact of stock dividends.
100% stock dividends
Yesterday, July 13, 2015, was the ex-date (or ex-dividend date) of NIKL’s stock dividend distribution.
Back in June 5, 2015, the company announced it is issuing 100% stock dividends to stockholders. That means eligible stockholders will get 100% of NIKL shares they own free of charge. Nice, right? But the impact of that is that prices will have to go down.
Why? We’ll explain in a bit. First, let’s review the important terms in dividend distribution.
Dividend Declaration Date. The Declaration Date is the date the company makes the announcement that it is issuing dividends. On this day, the company also announces the ex-date, record date and payment date.
Ex-Date (or Ex-Dividend Date). The Ex-Date is the first day when buying a stock DOES NOT entitle the buyer to the dividends. Think of it as the first day you are “EX-cluded” from receiving dividends. From the ex-date onwards, anyone who buys the stock will no longer have the right receive the dividend.
Record Date. The Date of Record is when the company looks at its “records” or “books” to see who are the shareholders entitled to receive the dividend. As long as you own the stock before the ex-date, your name will be “on record” and you will be entitled to receive the dividends.
Payment Date. Obviously, the Payment Date is when the company disburses the dividend to stockholders on record. It is usually credited to one’s trading account or, alternatively, a check is sent to the stockholder if cash dividends are issued.
NIKL’s stock dividends
In the case of NIKL, only those stockholders on record as of July 16 are eligible to receive the 100% stock dividends. Since there is a 3-day settlement of stock transactions, the ex-date (or the deadline to determine who will be the eligible stockholders) is 3 days earlier which was yesterday, July 13, 2015.
On the ex-date, stock prices are adjusted to reflect the dividend distribution. This is why despite closing at P20.00 on Friday, NIKL opened on Monday, the ex-date, trading at P10.00 per share. Nothing actually happened except that the price reflected the impact of stock dividends.
Why was there a price adjustment in the first place?
The concept of Market Capitalization
To answer that, we need to review the concept of market capitalization. Market capitalization measures the economic size of a company by multiplying two numbers — the current price of the stock and the total number of shares outstanding.
Let’s assume that the current price of a stock is P20.00 and, for simplicity puposes, the total number of shares released in the market is 1,000. Multiplying these two figures, we get a market capitalization value for the company of P20,000.
If the company declared a 100% stock dividend, this means the total number of shares outstanding will increase by 100%. Since each stockholder will get an additional 100% of his shares, the total outstanding shares of the company will now be 2,000 from the original 1,000.
Stock dividends do not affect market capitalization
An important point to remember about stock dividends is that they DO NOT affect market capitalization in any way.
Thus, if market capitalization will not be affected by the increase in number of shares, the stock price will have to decrease in order to adjust for the increase in number of shares.
So given the same market capitalization figure of P20,000 and new total shares outstanding of 2,000, the stock price has to go down from P20.00 to P10.00 (computed as P20,000 divided by 2,000) — which is exactly what happened to NIKL yesterday.
Got it? Post a comment below if you have more questions or clarifications!