Split Bonus and Gains

It is surprising but yet it is true, divide a corporate pie into different slices and the sum of these slices will be larger than the original. Yes, we are talking about the corporate actions such as split and bonus announced by the company, wherein the number of shares increases in the hands of existing shareholders though their proportionate ownership remains unchanged.  In theory, these actions should not leave the share-holders any better than pre-announcements of these corporate actions. But it has been observed that in most of the cases there is an increase in the investor’s wealth after these announcements. Now let us check how these actions by the company have made the investors wealthier. Before arriving at any conclusion, we analysed data of all such split and bonus announced by the companies, since the start of year 2009.

Split
Stock split is a process under which high face value shares are split into lower face value shares. Some of the popular way of splitting shares is splitting share of Face Value Rs 10 each to Rs 1 Rs 10 to Rs 2 (10:2), etc. In total of 78 splits announcements made since January 1, 2009, the most common split was 10:1; almost 50 per cent or 37 companies announced splits in this ratio, followed by 10:2, which was announced by 23 companies. If we consider the performance of these companies post-announcement, we find that out of total 78 companies, there are 61 companies whose scrips are trading above the price prevailing on the date of announcement of split in shares.

For example, one of the highest gainer is KGN Industries that announced split in the ratio of 10:1 on June 09, 2009 when it was trading at Rs 457.5. The CMP (April 13, 2010) of the scrip is Rs 367 and if we adjust this CMP for the split ratio we get price of Rs 3670, which is 702 per cent above the price when split in shares was announced. Of course, one should not forget that there is a big question mark on the fundamentals of KGN Industries. The median gain in the scrip prices after their announcement till today is 39 per cent. But some may argue that even the market has doubled since low of March 2009. Therefore we compared scrip return with the market returns (Sensex) in the same duration. We found that on 54 counts the scrip returns beat the market returns. The median excess return of scrip over market was 23 per cent. Now let us check how companies declaring bonus have performed.