I really do not like stock dividends because, in my opinion, they really do not benefit the small investor. Actually, from my point of view, stock divs are actually prejudiced against small investors. How? Consider the following:
(Caveat, this is for the Philippine setting as it may be different in other countries.)
Image source: TelegraphUK
First, a stock dividend means that you will get additional shares of your company. This amount is usually expressed as a percentage of your current holdings so a 25% stock dividend means that you will get an additional share for every four shares you own by the end of trading on the day BEFORE ex-date. (If ex-date is today, August 13, 2014, the amount will be based on the number of shares you held YESTERDAY, August 12, 2014.)
Sounds good right? Well, not really. Because while the number of your shares will increase, the price of each share will also go down. In fact, stock dividends, by themselves, will NOT increase the value of your holdings. Parang ganito lang kasi yan: Meron kang 4 na 25-cent coins so piso hawak mo. After a stock dividend, meron ka nang 10 na 10-cent coins. Mas marami ka ngang hawak pero piso pa din halaga nito. For it to actually benefit you, the stock price has to go up — which is both something that is NOT guaranteed to occur and something that could have happened without the stock dividend. At this point, all still seems well, but if you are a small investor in the PSE, this is just about where things start to go down.
The thing is, shares in the PSE have to be traded in “Board Lots” — depending on the stock’s current price. Basically, the higher the price the smaller the board lot. So, a company like Megaworld has a board lot of 1,000 while PLDT has a board lot of 5. This means that you have to buy / sell shares of Megaworld by the thousands while PLDT gets traded in multiples of 5. If you want to transact shares that do not conform to the “Board Lot”, then you have to post it on the “Odd Lot” board. You cannot mix and match. Specifically, if you want to buy 8 shares of PLDT, you will have to post two orders — one for 5 shares and one for 3 shares. And it is with the odd-lot board that we have problems.
You see, in the odd-lot board, you have to find ONE person who wants to trade the EXACT number of shares you want at the EXACT same price. Example: If I want to buy 10,000 shares of Megaworld, I can end up buying from anywhere between 1 to 10 different people. If I want to buy 345 shares of Megaworld, I need to find precisely ONE person who is willing to sell EXACTLY 345 shares as well. This makes it quite difficult to trade odd-lot shares and many people are forced to sell at lower prices just to be able to liquidate their holdings. And with the minimum fees all brokers charge, this will mean that a small investor will pay HIGHER fees relative to their transaction value.
To illustrate all of the issues, lets take an example:
A company declares a 100% stock dividend.
Current Price is 90 pesos per share
The board lot of the firm is 10. Meaning you have to trade in multiples of 10.
Let’s say you have 70 shares. Before ex-date, you can sell all 70 shares with minimal problems. On ex-date, you will own 140 shares (70*2).
However, any gains brought about by the increased number of shares will be offset by a decrease in price. In our example, if the closing price on the day BEFORE ex-date is 90, on ex-date, the price will be adjusted to 45 (90/2) pesos per share. Notice how, in terms of portfolio value, there was no improvement: You owned 6,300 pesos worth of shares before and after the stock div. But, since the board lot for firms trading at 45 pesos is now 100 shares, that means you cannot sell your 40 shares easily. You will need to find someone who wants to buy EXACTLY 40 shares. Take it from me, selling on the Odd-lot board is a tricky proposition. So, from being able to sell 100% of your position, you can now only sell 71.43% on the main board. Almost 30% of your portfolio can no longer be liquidated easily — something that was not an issue PRIOR to the stock div.
Does this really happen in real-life? Yes. Megawide declared a 40.50% stock dividend. Union Bank 65% stock dividend and China Bank 8% stock dividend. In all three cases, smaller holders will most likely be left with odd-lots after the dividend — hence, “Stuck Dividends”
What can you do? Buy or sell shares prior to ex-date so that you will still have board-lots after ex-date.
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