Impact of Stock Dividend: Huge decrease in price!

Earlier this morning, I panicked after logging in to my BPITrade online trading account because one of my holdings, Philex Mining Corporation (Stock Code: PX) was trading at only 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: WTF! 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 news report 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

First, 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.

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 is priced at 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 for the increase in number of shares.

The existing market capitalization of P28.2 billion divided by 3.9 billion total shares 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.

Must read these other awesome, educational posts!

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12 thoughts on “Impact of Stock Dividend: Huge decrease in price!”

  1. Generally one invests for the long term. Unless you are a day trader, you want to weather the ups and downs that your investment takes. Pulling all your money out of a falling stock, unless you know the company is tanking, is a bad idea. Rather, it’s at times like these where you want to buy more of the stock (“buy low, sell high”). So, while it is good to do some research to see if the company is in its death throws, don’t worry so much if your shares lose a few pesos.

  2. It’s good you actually did not take a loss over philex. Usually companies who declare stock dividends wanted to rev up their share. Market does not really react the way the company expected it to be.

    To avoid future surprises, I suggest you should assess when you buy a share the price you will sell it (high or low). When shares lose value, you sell it to limit your losses or when shares increases in value, you sell it to realize a gain and not waiting to lose it up again. Just determine your selling price right at the time you purchase the shares.

  3. hi.. pwede makahingi ng tulong. i have a personal paypal account. kaso someone paid me through credit card. I can’t accept the money without upgrading. I seldom accept payments from credit cards. should i upgrade to business account?

    ano ba ang fees if lets’ say ngwithdraw ako to my eon accoun using business account in paypal? thanks PMT

  4. LOL

    BEWARE on the Market Cap Div Outstanding shares Formula… that is not a very accurate way in determining the true market value of a stock/share… you don’t want to fall into the same trap to where people LOSE money because of BAD and irrational investment decision and Advice… =)

    If you dont believe me look at the historical prices of various companies in PSE…

    sabi nga invest in your financial education =) trading = GAMBLING its not Investing.

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