Friday, July 20, 2012

Stock Dividends and Stock Splits


Dear Investor Juan

Sir, what can you say about ACE. I'm worried about my investment. I bought some shares of ACE and the trend is going down. Any insights. Thanks.


Dear Maxin,

I checked the stock's performance on the PSE website, and you're right, ACE experienced a price drop of around 66% on June 20, from 15 pesos to 5 pesos per share. If this significant drop was due to some catastrophic event, it should be all over the news right? Especially since ACE or Acesite Hotel Corporation runs several well known hotel chains in the country, including The Holiday Inn and the Waterfront Hotels in Cebu. But after a quick "desktop" research, it turns out that the drastic drop in the per share price was just brought about by the issuance of stock dividends, so there's no real reason to worry. While it's still possible that you have lost money, depending on the price at which you bought your shares, it's definitely not as much as the "decrease" in stock price indicates.

Slicing the pie

On June 11, ACE announced the issuance of stock dividends to outstanding stockholders registered on or before June 20 (ex-date), to be paid on or before July 19, 2012. Stock dividends do nothing more than divide the company into more "slices" by issuing more shares to current shareholders: since the total market value of the firm's equity should theoretically remain the same, the move should result in a lower stock price. Stock splits pretty much work the same way; stocks could be split two-for-one, three-for-one, or in any other way.

Stock dividends and stock splits have the same fundamental purpose: to attain a particular level of stock price that is targeted by management, for whatever reason. Conceptually, a firm would want to avoid a very high per share price to make the stock more affordable to retail investors. In practice, however, the "cosmetically high" prices of stocks like Berkshire Hathaway in the US (at a whopping 126,995.00 USD per share) and even PLDT in the Philippines (2,716 pesos per share) puts this line of reasoning into question. And clearly, at 15 pesos per share before the stock dividend issue, this rationale does not apply to ACE at all.

Related Posts Plugin for WordPress, Blogger...