This week we why and how bonus issue and share split matter for investors followed by what’s trending in markets and curated good reads.
Outline
1. Market snapshot📈
Indian markets had a bad week as indices shredded -4.4% overall driven by an out of turn rate hike by RBI as well as hikes globally driven by fears that inflation can be persistent.
The only sector in green over the last month is Power as India is seeing the highest power demand ever. We believe the increased power consumption would steer the industrial growth and this correction presents a buying opportunity incorrect pockets.
We have identified some and launched the Do as the Promoter does stock basket with a diversified selection of 20 good companies where promoters have been increasing their stake substantially. Read more here and consider subscribing!
2. Does bonus issue and share split matter for investors? – myths and realities 🎁💹
Recently, the market has been abuzz with announcements of bonus issues/ split shares from many companies such as Tata steel, Varun beverages, Hindustan Foods, AU small finance bank & Nazara technologies.
Let’s briefly understand what happens when a company announces a bonus issue/split share:
- In the Bonus shares issuance, additional shares are provided to the existing shareholders at the zero cost in the specified ratio by the company, and the share price also declines in this same proportion.
- 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.
Varun beverages share price increased by 4% after the bonus issue announcement and this is not 1st time that shareholders became excited about the news. This happens all the time🤷♀️ and one such example is IEX when a few months back (Oct’21) it announced bonus shares & the price increased by 20% hitting its 52-week all-time high. So many investors believe this:
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.
Some common myths in the market:
- 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.
- The only benefit from the bonus is that the price gets affordable & stock gets the liquidity? No.
- Dividends don’t increase with the increase in the number of shares? No, the majority of the time it does because management usually keeps the same dividend/share even on higher shares, as otherwise, it would hurt their reputation.
Now that the most common myths are busted, Let’s move forward & decode how exactly these issues reward the shareholders:
1. Through dividend income (which the majority of us tend to ignore nowadays) even though share price falls, the majority of the time, dividend per share remains the same or doesn’t fall in the same proportion as the price, due to which shareholders benefit more from the dividend income on a higher number of equity shares.
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.
As we can see in the above table, the shareholders who got the bonus shares in FY19 would have earned Rs16 dividends per share in FY20 and if would have held the stock till now, dividend income alone would have been Rs140 which is double compared to shareholders who didn’t receive the bonus shares.
(ii) Similarly, Eicher motors announced split shares in Aug’20 in the ratio of 10:1. The company announced a dividend of Rs 17/ share on Aug’21 compared to the historic peak dividend of Rs125. So the shareholders who received 10x bonus shares after the split share received the highest ever dividend of Rs170 (Rs17* 10 bonus shares).
2. From an increase in Market capitalization of the company:
After the bonus/ split the share price seems less costly on absolute terms, and a large number of retail shareholders are able to buy the stock. Higher demand for the stock, again, ultimately (immediately in a few cases) leads to higher share price, thus increasing the market capitalization of the company.
Example:
(i) HCL technologies: Market capitalization increased from 1.41 lakh crs to 1.51 lakh crs immediately after the bonus shares were tendered.
(ii) Eicher Motors: Similarly in Eicher motors, the market cap increased from 47,000crs to ~60,000crs after a few days of the split share.
3. Bonus stripping: Many people, especially wealth managers used to do bonus stripping to save the taxes as one could have saved ~20% tax by booking short-term losses against long-term gains.
But this strategy is no more often used after the IT amendment because now long-term capital gains are taxed at 10% which means the tax benefit has been reduced by 10%. To know more details, click here.
So the Bottom line is: On the face of it, it seems like the bonus/split issue has no value but eventually shareholder is rewarded because it is not a zero-sum game. Rarely does someone talk about this on social media because people who genuinely understand & implement this psychology game, usually stay quiet?
3. What else is trendin’?🤙🏻
✔️ India is facing cooking oil shortages. This is because government has been focusing a lot on increasing the sugar crop acreage to encourage ethanol blending. This has led to declining in the acreage of pulses & oilseeds. According to Siddhartha Bhaiya, with more use of ethanol, we will reduce crude imports but at the same time India will have to import refined oil & pulses. So net-net there will be no impact on the import bill.
✔️Union bank became the 1st public-sector bank to start working as an account aggregator. Till now 3,32,000 customer accounts have been linked with this overall framework. Now, the next step will be to get more banks, especially, SBI to get live under the same.
4. Good reads 📚
4.1 A write-up by Morgan Housel on “How people think”
4.2 An article on Warren Buffett and Ted Williams on how to make better decisions in life and work.
4.3 A research paper on “Do stocks outperform treasury bills?”. This paper gives a good primer on why it is so important to choose stocks carefully and buying leaders usually helps. Because in the data mentioned here that:
“The best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as other stocks collectively matched Treasury bills” and these 4% of the companies definitely include all the FAANG stocks which are again leaders.
See you next week. Until then, happy investing!
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