Corporate Kenya’s love for stock splits and bonuses shows no sign of abating. Fourteen companies over the past 11 years have issued bonus shares. The story of stock splits is no different and Limuru Tea has just joined the fray.
Bonus or stock splits appear to be a good way of boosting share prices. Increased corporate action around these events usually attracts raised speculative activity that often sends share prices in one direction – up. It is easy to see why this path is attractive to boards especially when company shares are weak or when perks are tied to share performance.
Interestingly, price action in response to such actions is often vehemently dismissed by financial theorists who believe exuberance around bonuses and stock splits as something that should not happen.
They argue that for stock splits, stakeholders get equally additional number of shares which means relative shareholding in the company remains unchanged and hence a stock-split need not warrant a re-rating of the stock.
They also believe immediate implications of bonus issues should have almost the same results as that of stock splits; no price movement. This belief is hinged on the fact that bonus issues only involve a company capitalising its reserves.
This theoretical perspective suggests the share price of a company issuing bonus shares or effecting stock splits should adjust so that the total shareholder wealth remains unchanged.
In the practical world, especially in Kenya, stock prices rarely follow this theoretical prescription in bonuses and stock splits. Not only does the share price of a company run up on announcement of bonus or stock splits, but even the ex-split or ex-bonus prices usually add up to more than the pre-split/bonus price. Bonus or stock splits, therefore, appear to be a good way of boosting stock price.
Crown Paints recently announced a two-for-one bonus. Since the notice was released, the stock has run up from Sh102 (April 27) to Sh151 (May 11) or a massive 48 per cent gain.
On October 13, 2013, Carbacid split its stock five-to-one. By the close of the second month after, it traded at a peak of Sh62 from a pre-split value of Sh29.
However, 18 months down the road, the share is now trading at three-year lows.
ARM Cement also rallied 48 per cent from Sh40 (May 2012) seven months after splitting five-to-one. Longhorn Publishers astonishingly doubled to a speculative high of Sh28 (November 10, 2014) after issuing a three-to-two bonus issue in the previous month.
Improved liquidity in the market and accessibility appear to be the main reasons prices shift upwards in the short run.
In both bonuses and stock splits, fundamentals do not change since no cash is handed to investors. It is possible this could be why financial theorists have not paid attention due to the short-termism.