What are Corporate Actions?
Right, first off, I have to be honest – this topic isn’t the most exciting. Some would go as far to say that it’s rather quite boring! However all this information on Corporate Actions is important to know if you’re investing.
Definition of a Corporate Action
A Corporate Action, is basically something that a listed company can do to affect their issued equity or debt in the market – essentially something that is going to affect you as a shareholder. (I know this sounds potentially complex but I couldn’t come up with an easier way to put it!). A few examples below will help clarify.
Why and what a company does to it’s stock is important to an existing or potential investor as it can provide you with information in order to help you decide whether you should buy, hold or sell. The examples below are by no means the full list but these are the ones that I come across most frequently .
One type of Corporate Action that most people will have heard of are dividends. Dividends can come in two forms. The most common one I have experienced is a cash dividend.
These are pretty straight forward in that the company will announce a sum per share to be paid to shareholders. E.g. each share held on the ex-dividend date to be paid 20 pence. So if you hold 1000 shares, you get a sum of (1000 x £0.02) £200 paid to you.
As an investor one point to note is that when a company issues a cash dividend the equity or cash held by the company will reduce i.e. the amount of cash the company has in the bank will go down.
The other type of dividend is a shares/stock dividend. These work in pretty much the same way but instead of paying shareholders cash, they are paid in shares. If, for example a share dividend of 1% is declared and you hold 100 shares on the ex-dividend date, you will receive 1 new share.
There are a few other key dates you need to be aware of – check them out here.
I love dividends. Essentially it feels like free money hitting my account when I receive them. Personally I always re-invest my cash dividends and don’t take the money, it’s a nice easy way to passively grow your pot of shares.
Many people find companies that issue large dividend payers and invest solely based on this. If you ask me, looking at a company’s dividend policy is important but it’s not the only thing to look for when deciding whether to invest or not.
Split and Consolidations
Share splits and consolidations are fairly easy to get your head around.
A share split is exactly how it sounds. A company may decide that they are going to split their share capital. A good example is Apple (you know that small consumer electronics maker). They decided to split their stock by 7-1. So if you had 1 share on the record date, you would end up getting another 6 making a total of 7. The price would also be split, so when they split from around $700, each share was worth around $100 afterwards.
You may be thinking, “What’s the point in that??” Well it’s more of a psychological thing I think. When a share price is that high, it limits who is going to invest in them. I mean, if one share is going to set you back $700, you may be thinking if it’s worth investing in or not – in addition, you may not even have $700 to invest in one go!
Given the above share split example, you can probably guess what a consolidation is. Yes, it’s the reverse.
Just to drum it in. A consolidation is when a company decides it wants to reduce the number of issued shares. An example would be that if there are 100,000,000 shares in the market, it may decide to reduce this number by half, and consolidate by a factor of two.
So if you as a holder on the record date and have 100 shares, you’ll end up with 50, with their total worth being exactly the same.
Again – what’s the point?? Well there could be a few reasons which all tie to the same reason. To attract more investors.
People could be put off by investing in a company with a low share price, especially penny shares.
Ok, so of the examples so far, this Corporate Action is the most complex. Luckily for everyone involved it’s again fairly straightforward to understand.
A rights issue is used when a company wants to raise some cash. What this entails is offering existing shareholders the option to buy more stock at a reduced price.
I can give you a current example. I hold Entertainment One (ETO) shares, which are undergoing a rights issue now. ETO want to raise £200m to finance a bigger stake in Astley Baker Davies (the makers of Peppa Pig) so what they’ve done is offered shareholders a 4 for 9 shares at a price of £1.53. This is a big discount to the current price, £2.25.
This means that if you’re a shareholder on the ex-date, you have the option to buy 4 shares for every 9 you own.
Now this isn’t the only option you have. You can:
Choose not to do anything and let your rights lapse. Choose to partially take up your rights and only buy a portion of the shares you are allowed. Choose to sell all your rights. Yes – this almost sounds tricky but your rights are tradable. So you can instruct your broker to sell them for you. Choose to sell some of your rights. I’m not sure why anyone would let their rights lapse but I guess that’s the option for people that don’t understand what a rights issue is and do nothing about it!
This is not the same as a rights issue. A placing is an offer to a small set of investors to take up shares. These small sets of investors are usually institutions.
I generally don’t like placings as they are usually offering shares to institutions at a lower price to the current share price. It’s ok when the discount is a 3-5% but when it’s 20-30%, it’s annoying!
As I said above, this isn’t the whole list of Corporate Actions but it should be enough to get you started. If you made it down this far, well done! Maybe it wasn’t such a boring read after all!