Description
An event study of seleceted firms (Wipro, ITC, Aegis logistics, L&T ltd, Sterlite Industries, EIL) on their share price around stock dividends
Share Price behaviour around Stock Dividends: An event study of select Indian firms
Bonus Share
? An extra dividend paid to shareholders in a joint stock
company from surplus profits
? The bonus to its shareholders in the form of shares; a free
share thus issued is known as a bonus share
? Based upon the no. of shares that the shareholder already
owns at the time of announcement
? While the issue of bonus shares increases the total number
of shares issued and owned, it does not increase the value of the company
Current Scenario regarding bonus shares
? As many as 19 companies have come out with bonus issues
in the first quarter of 2010-11 compared with five in the same period last year, with ITC, MMTC, Orbit Corporation and Edelweiss Capital in last 10 days
? In reality, there is no value addition since there is no inflow
of money – no direct benefit to shareholders
? However, it can help improve the liquidity of the stock as
there are a greater number of shares available for trading
Benefits
? Mostly indirect benefits. There have been instances when
stock prices have run-up substantially pre- or post a bonus issue. For example, the MMTC scrip spurted 21% on June 15, a day after its board announced that it would consider a bonus issue. ? Bonus shares are sometimes used to offset short-term capital gains tax. For example, an investor can purchase a stock ahead of the bonus issue, and sell it ex-bonus after the stock price adjusts. Since the stock price will reduce exbonus, the transaction can be shown as a loss, which can be offset against short-term capital gains.
6 Indian Companies looked at
? Beta < 1 ? Wipro ? ITC ? Aegis Logistics ? Beta > 1 ? L&T Ltd ? Sterlite Industries ? EIL
Wipro
? 25-June-04: Bonus 1:2 ? 22-Aug-05: Bonus 1:1 ? 15-June-10: Bonus 3:2
Benchmarked with Sensex
? Beta – 0.93
ITC
? 21-Sep-05: Bonus 2:1, Split 10:1 ? 3-Aug-10: Bonus 1:1
Benchmarked with Sensex
? Beta – 0.61
Aegis Logistics
? 18-Aug-2010: Bonus 3:2
Benchmarked with Sensex
? Beta – 0.76
Pros and Cons to Aegis
Pros
Conserves cash within the company Increases capital base Retention of management control
Cons
Need to grow business
Increase number of share counts
Risk of increase dividend cash outflow
Larsen & Toubro Limited
? 28 Sept-2006: Bonus 1:1 ? 01-Oct-2008: Bonus 1:1
Benchmarked with Sensex
? Beta – 1.44
Sterlite Industries
? 6-Feb-2004: Bonus 1:1 ? 5-May-2006: Bonus 1:1
? 21-Jun-2010: Bonus 1:1
Benchmarked with Sensex
? Beta – 1.37
Engineers India Ltd
? 6-May-10: BONUS 1:2
Benchmarked with Sensex
? Beta – 1.48
Thank You
doc_685226972.pptx
An event study of seleceted firms (Wipro, ITC, Aegis logistics, L&T ltd, Sterlite Industries, EIL) on their share price around stock dividends
Share Price behaviour around Stock Dividends: An event study of select Indian firms
Bonus Share
? An extra dividend paid to shareholders in a joint stock
company from surplus profits
? The bonus to its shareholders in the form of shares; a free
share thus issued is known as a bonus share
? Based upon the no. of shares that the shareholder already
owns at the time of announcement
? While the issue of bonus shares increases the total number
of shares issued and owned, it does not increase the value of the company
Current Scenario regarding bonus shares
? As many as 19 companies have come out with bonus issues
in the first quarter of 2010-11 compared with five in the same period last year, with ITC, MMTC, Orbit Corporation and Edelweiss Capital in last 10 days
? In reality, there is no value addition since there is no inflow
of money – no direct benefit to shareholders
? However, it can help improve the liquidity of the stock as
there are a greater number of shares available for trading
Benefits
? Mostly indirect benefits. There have been instances when
stock prices have run-up substantially pre- or post a bonus issue. For example, the MMTC scrip spurted 21% on June 15, a day after its board announced that it would consider a bonus issue. ? Bonus shares are sometimes used to offset short-term capital gains tax. For example, an investor can purchase a stock ahead of the bonus issue, and sell it ex-bonus after the stock price adjusts. Since the stock price will reduce exbonus, the transaction can be shown as a loss, which can be offset against short-term capital gains.
6 Indian Companies looked at
? Beta < 1 ? Wipro ? ITC ? Aegis Logistics ? Beta > 1 ? L&T Ltd ? Sterlite Industries ? EIL
Wipro
? 25-June-04: Bonus 1:2 ? 22-Aug-05: Bonus 1:1 ? 15-June-10: Bonus 3:2
Benchmarked with Sensex
? Beta – 0.93
ITC
? 21-Sep-05: Bonus 2:1, Split 10:1 ? 3-Aug-10: Bonus 1:1
Benchmarked with Sensex
? Beta – 0.61
Aegis Logistics
? 18-Aug-2010: Bonus 3:2
Benchmarked with Sensex
? Beta – 0.76
Pros and Cons to Aegis
Pros
Conserves cash within the company Increases capital base Retention of management control
Cons
Need to grow business
Increase number of share counts
Risk of increase dividend cash outflow
Larsen & Toubro Limited
? 28 Sept-2006: Bonus 1:1 ? 01-Oct-2008: Bonus 1:1
Benchmarked with Sensex
? Beta – 1.44
Sterlite Industries
? 6-Feb-2004: Bonus 1:1 ? 5-May-2006: Bonus 1:1
? 21-Jun-2010: Bonus 1:1
Benchmarked with Sensex
? Beta – 1.37
Engineers India Ltd
? 6-May-10: BONUS 1:2
Benchmarked with Sensex
? Beta – 1.48
Thank You
doc_685226972.pptx