Corporate Actions
A "corporate action" is an event initiated by a publicly listed company that
may affect their securities and shareholders.
Examples: a dividend payment, a share split or share
consolidation, a bonus issue or a rights issue.
WHY are corporate actions necessary?
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To return company profit to shareholders
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To have an effect on the share price
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To raise extra money
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To increase profit levels by restructuring
WHERE can a shareholder find
out more about a corporate action?
By calling the relevant share registry for the company you own shares in, or by
speaking to the NZ Scrip Settlements team at Direct Broking Limited.
HINT: You can find the appropriate share registry by looking
at the "Transfer Agent" in Direct Broking's Quick Quote, Detailed screen.
DIVIDENDS
The most common corporate action is a dividend payment - a company may issue a
dividend as a way of returning some of the profit to shareholders.
Companies that choose to pay a dividend may do so once a year, twice a year or
four times a year, depending on their dividend policy.
NOTE: not all companies pay a dividend.
Below is a fictional example of the effect that a dividend payment may have on
a (New Zealand) company's share price.
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Company: |
XYZ |
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Current share price: |
$1.50 NZD |
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Dividend amount: |
$0.10 NZD per share |
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If you own 10,000 XYZ shares then your total dividend payment is $1,000.00
NZD |
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Day 1 |
Stock is quoted as "CD" or "Cum Dividend" |
XYZ = $1.50 per share |
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Day 8 |
Stock is quoted as "XD" or "Ex Dividend" |
XYZ = $1.40 per share |
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Day 10 |
"Record" or "Books Close" date |
XYZ = $1.40 per share |
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1-2 weeks later (or longer) |
Payment Date |
Dividend = $0.10 per share |
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These prices and dates are only used as examples. |
NOTE: For New Zealand (NZX) and Australian (ASX) listed shares, the "Record" or "Books Close" date occurs AFTER the "XD" date.
If a shareholder buys NZX or ASX shares on a "CD" basis and holds until the "XD" date, they are eligible for the dividend.
CD - Cum Dividend
The word "Cum" is Latin for "with".
If you purchase XYZ shares when they are quoted CD you are eligible for the
dividend on the next payment date, provided that you are still a shareholder on
the Record/Books Close date.
XD - Ex Dividend
"Ex" is simply the opposite
of "Cum" - "without".
If you purchase XYZ
shares when they are quoted XD you are not eligible for the dividend on the
next payment date. The XD share price often decreases by an amount equivalent
to the amount of the dividend per share. The shares remain XD until the next
dividend is announced to the market, after such time the shares will be quoted
as CD again.
Record/Books Close Date
This is the day the registry determines which shareholders were on the register when the shares were trading CD.
Note: shares bought between the Ex Date and Record Date do not entitle the buyer to the dividend.
Payment date
Dividends are usually paid out 1-2 weeks
(or longer) after the first day that they were
quoted XD. Unless they have been advised otherwise, the Share Registry will
send your dividend payment to you by cheque. If you wish to have the dividend
payment paid directly into your bank account, please contact the appropriate
Share Registry.
DRP - Dividend Reinvestment Plan
Some Companies allow shareholders the choice of receiving the equivalent amount
of shares instead of a cash dividend to increase their holding in the company.
A DRP needs to be organised directly through the issuing company.
SHARE SPLIT
If a publicly listed company feels that the market price of their stock is too
high and that shareholders may not be able to afford to buy shares, they can
adjust the price by splitting the number of shares on issue.
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Company: |
XYZ |
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Share split ratio: |
2 shares for every 1 (2:1) |
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Share price: |
$2.00 |
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$1.00* |
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Shares on issue: |
1,000,000 |
- After - |
2,000,000 |
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Market Cap: |
$2,000,000 |
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$2,000,000 |
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(Market Cap = current share price x shares on issue) |
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These prices are only used as examples. |
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* Due to a dilution factor of 1/2 ($2.00 x 1/2 = $1.00) |
In the example above, the share price has been adjusted because each
shareholder now holds twice as many shares as they did previously.
Thus, the shares are cheaper and may become more frequently traded if
shareholders can now afford to purchase the shares.
Even though the price quoted in the market has decreased, the value of a
holding remains the same because the amount of shares owned has been altered to
reflect the new price.
> You own more shares but they are now at a
lower price.
SHARE CONSOLIDATION
Likewise, if a publicly listed company considers the share price to be too low
and that in turn, shareholders may have a low opinion of the company's
reputation, they can adjust the price by consolidating the number of shares on
issue.
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Company: |
LMN |
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Share consolidation ratio: |
1 share for every 4 (1:4) |
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Share price: |
$1.00 |
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$4.00* |
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Shares on issue: |
1,000,000 |
- After - |
250,000 |
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Market Cap: |
$1,000,000 |
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$1,000,000 |
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(Market Cap = current share price x shares on issue) |
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These prices are only used as examples. |
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* Due to a dilution factor of 4/1 ($1.00 x 4/1 = $4.00) |
In the example above, the share price has been adjusted because each
shareholder now holds one quater of the amount of shares as they
did previously.
Thus, the shares are worth more and may become more frequently traded if
shareholders may begin to associate a higher price with a "better" company.
Even though the price quoted in the market has increased, the value of a
holding remains the same because the amount of shares owned has been altered to
reflect the new price.
> You own fewer shares but they are now at a
higher price.
BONUS ISSUE
A bonus issue is the FREE issue of shares that are issued to shareholders on a
pro-rata basis: for example, 1 bonus share for every 5 existing shares.
A publicly listed company may decide to issue bonus shares in place of a
dividend or if their level of assets has improved.
The market price of a share is likely to drop when a bonus is issued because an
increase in the level of shares in the market means that the company's assets
have been broadened over more shares.
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Individual holding: |
10,000 shares |
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Share price: |
$1.50 |
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Holding value: |
$15,000 |
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Bonus Issue Ratio: |
1 bonus share for every 4 (1:4) |
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= 2,500 bonus shares (no brokerage charge!) |
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New individual holding: |
12,500 |
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Share price: |
$1.20* |
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New holding value: |
$15,000 |
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These prices are only used as examples. |
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* Due to a dilution factor of 4/5 ($1.50 x 4/5 = $1.20) |
RIGHTS ISSUE
A rights issue is a method for a company to raise extra capital.
An offer to buy more shares, usually at a price below the current market price,
is distributed to existing shareholders on a pro rata or equal basis, e.g. the
right to buy one new share at a discounted price (occasionally with options
attached) for every five shares held.
Non-Renounceable rights issues only allow entitled shareholders to take up
their rights or let them lapse.
Renounceable rights issues allow the entitled shareholder to sell their rights
in the secondary market, to take up their rights or to let them lapse.
The shareholder will receive paper work outlining the rights they have been
allocated and the amount they need to pay (application money) to purchase the
securities that the rights entitle them to.
In the example below, an investor could buy the rights in the secondary market
and "take up" their rights, effectively paying $1.15 for a share that is worth
$1.20 on the market.
To sell their shares issued from the rights, they must be allocated so it may
not be worth $1.20 after the allocation date - it may be worth greater or less
than the combined rights market price and application money ($1.15)
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Key Terms: |
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Entitlement Ratio |
1 new share for every 5 existing shares |
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Issue Price (application money) |
$1.05 |
The price that a shareholder pays to take up the rights (no brokerage charged
on application money) |
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Total New shares |
100 million new shares to be issued |
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Gross Proceeds |
NZ$105.0 million to be raised |
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Key Dates: |
(the dates below are examples only) |
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Ex Rights |
Day 1 |
The head shares will trade on an XR (Ex Rights) basis. Shares bought on and after
this date do not provide the buyer with an entitlement to the Rights |
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Rights Quotation |
Day 1-13 |
The rights are tradable as a separate security, e.g. XYZR
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Record Date |
Day 3 |
This is the day the registry determines which shareholders were entitled to the rights on the Ex Date.
Note: shares bought between the Ex Date and Record Date do not entitle the buyer to the dividend. |
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Offer documents sent out |
Day 5 |
Documents are sent to eligible shareholders. |
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Offer closes |
Day 17 |
This is the day on which application money must be received to take up the
rights. |
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Allotment of new shares |
Day 19 |
This is the day on which the new shares are issued, new XYX shares are tradable
the same day. |
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Shareholdings: |
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Individual holding |
10,000 XYZ shares |
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Rights allocated |
2,000 XYZ rights (10,000 x 1/5) - no brokerage charged to existing
shareholders. |
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Application money |
$2,100 (2,000 x $1.05) |
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XYZ share price |
$1.20 |
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XYZR (tradable rights) price |
$0.10 |
The price that 1 "right" is worth on the market (only applies if the rights are
tradable.) |
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These prices and dates are only used as examples. |
For further information or advice about dealing with Corporate Actions, please
contact the NZ Scrip Settlements Team at Direct Broking.
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