Dividends, Stock Splits, and Rights Offerings (Basics)

Dividends, Stock Splits, and Rights Offerings (Basics)

Dividends are shareholders’ per-share profits received from a portion of a company’s earnings and as agreed upon by its board of directors. Dividends may come in forms of cash, additional shares, other non-monetary properties, scrips or promissory notes, and liquidating dividends.

Coffee break, please! Wow! It’s already first of May. Five more days and I’ll be celebrating my 20th-something birthday. That’s a not-so-honest one, but mind it, I don’t throw grand birthday parties. As usual, we’ll just eat together a dinner out. You can leave your birthday messages below though. Thanks…

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See. I was never wrong. MPI stock just closed yesterday at PHP5.10 apiece. At least, I’ve got green figures in my portfolio. I’m still waiting for the uptrends of my two other stocks –MRSGI and WEB. Good thing, I’ll have MRSGI cash dividends tomorrow. Meantime, here’s a sample cash dividend notice I got in November last year.  

Sample Cash Dividend Notice

Cash Dividends

Among all forms, cash dividends are the most common in which shareholders receive cash profits on a specific later date provided that shares are held prior to the ex-dividend date.

If you purchase shares on or after the ex-dividend date (exclusion date), then you’re no longer entitled to the latest cash dividends. Record date is simply the date when the company looks into its records or books, and hence, finalizes its list of shareholders entitled to receive cash dividends. Payment date is the actual date of dividend payment in which the company disburses cash and sends it to shareholders. Interestingly, these three important dates also apply to almost all forms of stock dividends.

“Sa madaling sabi, kung bumili ka ng shares sa mismong araw ng ex-dividend or kinalaunan pa, HINDI ka na makatatanggap ng kakadeklarang dibidendo. Sa kabilang banda naman, kung kamakailan lamang ay nagmamay-ari ka ng shares at ibinenta mo sa mismong araw ng ex-dividend o kahit kinalaunan pa, asahan mong KASAMA ka pa rin sa makatatanggap ng nasabing dibidendo.”

Stock Dividends and Splits

In simple terms, stock dividends are additional shares issued to existing shareholders. Accordingly, if issued are less than 25% of the total number of its outstanding shares, then they are actual stock dividends. If bigger however, these come in a stock split. Stock splits come in two more forms – forward and reverse stock splits.

A (forward) stock split is a corporate decision in which existing shares are divided into multiple shares for liquidity and market appeal purposes. Despite increase in number of shares by a specific multiple, the market value of shares remains intact and the same as pre-split value.

“Halimbawa, ang MRSGI ay may outstanding 20M shares sa merkado at naibebenta bawat share sa halagang PHP5. Sa pagtataya, ang kabuuang market cap nito ay 20M shares x PHP5 = PHP100M. Ngayon, napagkasunduan ng board of directors na magkaroon ng stock split na 2-for-1(100%). Matapos ang stock split, madodoble ang outstanding shares at magiging 40M shares x PHP2.5 = PHP100M (pa rin). So, hindi naapektuhan ang market capitalization nito.”

On the other hand, a reverse stock split results in a decrease in number of a company’s outstanding shares, hence an increase in its share price. Both forward and reverse stock splits do not necessarily affect the market value of shares, rather, as already stated, the stock’s liquidity and market appeal brought by a change in market price. Existing shareholders benefit from either split.

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Property Dividends

Less common than cash or stock, property dividends come in non-monetary forms such as physical assets and other company inventories. Current market value of these assets is considered and recorded during the issuance to individual shareholders.

Companies issue property dividends for a number of reasons including manipulation of taxable and declared income, non-availability of enough cash, and avoidance of stock dilution.

Scrip Dividends

Aside from properties and other physical assets, scrips may also be issued by companies to shareholders when they run short on available cash or fund. Scrip dividends are simply promissory notes or debt acknowledgment receipts payable to shareholders at a later date.

Liquidating Dividends

Also known as liquidating distributions, liquidating dividends are normally issued by companies as a precursor to shutting down the business operations or during their partial or full liquidation. As compared to regular distributions that are derived from the earnings or profits, liquidating dividends are issued from the capital base.

Stock Rights Offerings

Technically, stock rights offering entitles existing shareholders an option or right to purchase additional shares or increase stock position based on a certain percent or proportion at a discount price.

While advantageous for existing shareholders because of the discount, stock rights offerings may also be observed as a move of financially struggling companies, and hence flooding the market with more shares may result in dilution of the value of available shares. It is hence advised that shareholders avail the rights so to avoid this dilution.