Recently, we have a lot of market activities and a lot of companies start to 'dish out' bonus shares. One of the latest companies who is proposing a bonus issuance is Public Bank Berhad, our Malaysian home grown bank which has the lower CTI (Cost to Income) and NPL (Non-Performing Loan) in the industry regionally. Others include G3 Global, Amtel, UWC etc.
Public Bank Berhad intend to give out 15.53bil shares to the existing shareholders and the most important question is should you buy Public Bank due to the bonus issuance? The answer to this question is to answer what is a bonus share?
What is Bonus Share?
Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. This will increase the issued share capital of the company. However, by increasing the number of outstanding shares, it decreases the stock prices. Bonus share issuance is a 'zero sum game' exercise as the market capitalization technically does not change and investor don't actually gain more vs dividend (although they might if the share price was manipulated upwards later on). There is no tangible payment out from the company's account to the share holders
I would lay down some tangible examples of the benefits of Bonus Shares:
1. Enlarged share base will means that there are more shares to go around for transactions. Hence, for smaller companies it will increase the liquidity.
2. The stock price will be lower and hence perceived as 'cheaper' for retail investors (please take note that in investing, we normally define 'cheap' as low P/E ratio, low P/B ratio, EV etc, not with reference to the price of the share - however, a lot of non-financially savvy and strong retail investors will still assume that 'cheap' means 'low price').
How about Stock Split? Stock split is the action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares. Both Stock Split and Bonus issue is almost similar except that Stock Split will reduce the Par Value of the share. This is merely accounting issue where small and retail investors don't see any tangible difference between these two exercise.
What is Dividend?
A dividend is the distribution of some of a company's earnings to a class of its shareholders. In layman's term, the company made a profit and it channel part of it to its shareholders. It's being paid out from the company's accounts to the bank accounts of the shareholders. It normally has a ex-date where shareholders who owns the share by the 'ex-date' will be entitled for the dividend. We have a lot of companies like Maxis, KLCCP, REITS, Banking who are consistent dividend payers. And these days, the dividends received from Bursa Malaysia listed companies are tax-exempted as tax has been paid at company level prior to distribution.
Is Bonus and Dividend the Same and Should you buy in?
The biggest question in the room will be how should you react to news like Company A is declaring a dividend while Company B is giving out bonus shares. We will explain with scenarios below:
If you buy into Company A (which declared a RM0.50/share, assuming you own 1,000 shares), you will receive a dividend of RM500 (RM0.50 x 1,000) before costs of processing. Your share price will not be adjusted. However, sometimes post dividend the share price will drop a little as investors will have to wait 3 or 6 or even 12 months for the next dividend.
If you buy into Company B (which declared a 1-for-1 bonus), you will not get any cash in your bank account. Assuming that the share price is RM1.00 and you have 1,000 shares. The share price will be adjusted to RM0.50 and you will have 2,000 shares post Bonus Exercise. The outcome from the result is it will be the same (RM1.00 x 1,000 = RM0.50 x 2,000). However, there will be some advantage as I mentioned above especially if you are holding a small cap stock with limited liquidity. There will be more shares to go around for investors to trade.
I hope the explanation above will provide some insight to investors to learn and distinguish the difference between bonus and dividend. All of us (myself included) will start as a piece of white paper and we fill ourselves with knowledge as we grow in our investing journey.
