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basant
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   Posted: 25/Sep/2006 at 9:57pm |
Shareholder funds/RoE/RoCE/EPS/Book Value/Market cap etc remain same irrespective of split/bonus. They do not say anything else. As you know I would rather look at a company's environment and its management/business/competitors/market share/pricing power/operating margins/sales growth/cost parameters to decide. Corporate finance text books do indicate signalling etc but this is all too subjective something like the body language of the management. They just can add up a bit not decisive enough to make any meaningful suggestion.
To me a company that declared a bonus or a split makes no effect as a long term investor - Just nothing. I am neither too excited if any of my companies announces a bonus neither too depressed if it does not.
In fact in analysing a company I never see whether the company declares a bonus/split. Many people categorise a shareholder friendly company as one which declares a bonus - not sure how that logic works.
The only way these steps COULD affect stock price is through increased participation and trading volumes and liquid stocks generally have higher PE's thus providing a rerating to the stock
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Vivek Sukhani
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Posted: 25/Sep/2006 at 10:39pm |
"As you know I would rather look at a company's environment and its management/business/competitors/market share/pricing power/operating margins/sales growth/cost parameters to decide. ---------------------------------------------------------------------------------
Basant, apart from financials everything boils down to subjectivity. And market pays for subjectivite stregths. I can name 2 companies which have shown what continous bonuses can do...Havell's India and Opto Circuits India Limited.True the margins may appear attractive, growth story strong, but then why not every electrical company or any diagnostic/sensor company.... also look at some of the MNCs who had so liberally doled out bonuses in the late 80s and early 90s like Colgate and Castrol...its their mere legacy which makes them command such valuation. They have negliible Book value, EPS is also not very significant... yet the price they command is mind blowing. I agree with your logic on splits but am not in sync with your argument of indignificance of Bonus. Just tell me why does an Asian Paints command such a premium and a Kotak Bank or a HDFC for that matter...
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basant
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Posted: 25/Sep/2006 at 10:49pm |
In the US the heart of financial markets there is nothing like a bonus issue. They only have stock splits. This is how bonus issue is defined:
Bonus issue: Or, in the USA, a stock split. Whenever a company believes that the price per share of its stock has risen to a point where investors may wrongly perceive it as "expensive", they will split the stock, reducing the price but increasing the number of shares outstanding. For instance, if Huge Fruit Plc trades at £60 a share with three million shares outstanding and decides to split its stock two-for-one, this means that each share will now trade at £30 but there will be six million shares outstanding.
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They have negliible Book value, EPS is also not very significant... yet the price they command is mind blowing -
This is because of the high RoE; RoE is EPS/BV so a low BV would have a higher RoE - BV does not change because of a bonus/split.Also big dividend pay outs keep the book value low..
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Ajith
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Posted: 25/Sep/2006 at 10:56pm |
Regular bonus issues together with increasing dividends shows the investor-friendliness of the management and does have a positive impact on the company's image and PE though strictly speaking there should not be any effect which is why Berkshire Hathaway (I am not 100 per cent certain)has not issued any bonuses or doled out dividends.Shareholders of Berkshire believe that Buffet can better utilize the money and that will get reflected in the earnings and the market price.
As for face value splits the less said about them the better.What a waste of effort!!But I am really puzzled at the recent trend of the run-up in prices after the split-probably due anyway as in the case of Exide.
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Ajith
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kulman
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Posted: 25/Sep/2006 at 11:11pm |
I agree with the views expressed about Stock Splits: it's a MAYA (in Sanskrit). Nothing really happens to the financials, it only increases the liquidity (number of shares) and investor perception as it appears cheaper.
However, regarding Bonus issues (i.e. capitalisation of reserves), though nothing changes financially, it clearly signals a message of future potential growth(only applicable for good managements), and that it would be able to deliver/service enhanced capital base. That is why it is generally taken very positively by investor community.
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Life can only be understood backwards—but it must be lived forwards
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Vivek Sukhani
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Posted: 25/Sep/2006 at 11:42pm |
I know in US there's nothing called bonus. Microsoft's 1 share in 1986 has become 288 shares (or 286, I have to check) now.Thats also one of the reasons why its stock commands so much respect. Basant, you are one of the very few investors I have come across who doesnt view bonuses positively. As Ajith says, dividend along with bonus will make the share endearing to shareholders.
How come BV doesnt change with Bonus. A 1:1 bonus reduces your BV by half. It also reduces your EPS(future) by half. so, net net how does your ROE change?Couldnt understand, kindly clarify
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basant
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Posted: 25/Sep/2006 at 12:02pm |
I am indifferent to bonus/split Nothing positive/negative on that.
WHether you do a bonus or a split in (both in equal ratio).The Book value would come out the same. It would of course reduce but the number of shares going up would keep them the same post split and post bonus.I am elaborating it for you now:
Post Bonus BV= Post Split BV.
ALso i never said RoE does not change If you will read my first post this is what i said:
1) It reduces the share price but also reduces the EPS but the PE remains same.
2) Number of shares increases but their price falls but the wealth remains unchanged and so does the market cap.
3) 3)) RoE and RoCE remains same post the bonus and split.
4) There is no change in any of the profitability, turnover liquidity and solvency ratios
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prosperity
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Posted: 25/Sep/2006 at 12:39pm |
One thing is NOT very clear to me..
There is some different between "Split" and "Bonus" i.e. in split, the face value gets split up and in Bonus - the face value remains the same...
Market Cap remains the same in Both... But equity increases in bonus and not in split ...
I know most of the parameters remains the same, but can someone list down what are all the exhaustive differences between split and bonus like face value, equity, etc. etc.
Thanks !
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