20 Potential split and bonus candidates…
Editor’s Note: In this article we explain what motivates companies to opt for stock splits and bonuses and why illiquid companies and those with a narrow individual shareholder base and low institutional holding are potential candidates for such corporate action. However, if you are merely interested in knowing which companies may consider splits and bonuses, please refer to the table towards the end of the article.
Do you avoid buying high value stocks?
If yes, you are not alone! Even institutional investors do that sometimes, for a different reason though.
Many individual investors don’t have adequate resources for buying high value stocks without disturbing their asset allocation on many occasions. Or they are simply not comfortable buying high price stocks—I can buy only a few of them. While the former is a genuine concern for many, the latter is just a behavioural bias, but it’s prevalent.
For instance, if a retail investor wants to invest Rs 50,000 in stocks and decides to buy one stock of Honeywell Automation, he/she will end up investing 58% of his/her investable corpus in just one stock.
But if somebody feels buying a Rs 100 stock is more lucrative than buying a stock quoting at Rs 2,000 then it’s nothing more than a behavioural bias. Because a Rs 2,000 stock can become a Rs 2,500 stock but the stock bought for Rs 100 may not jump 25% during the same time period.
On the other hand, institutional investors may keep away from high value stocks if they are illiquid.
Since institutional investors buy/sell stocks in large quantities, the higher impact cost acts as a dampener at the time of buying/selling. According to the National Stock Exchange, the Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time.
The combination of low free float and lack of liquidity often gives rise to higher impact cost.
Why is institutional holding important?
Institutional holding can signal strength or weaknesses in a stock. For example, if a stock is popular among institutional investors, such as mutual funds and insurance companies, it’s reasonable to assume that it’s passed through some stringent stock selection criteria and looks attractive to a number of investors.
However, if you extend this argument and say, stocks that don’t have institutional holding or have very low institutional holding aren’t good companies then that might lead to an unintelligent conclusion. Sometimes, institutional investors stay away from a few stocks due to technical factors such as the illiquid nature of the counter.
In summary, institutional investors prefer highly liquid stocks.
How liquidity of any counter can be improved
Usually, listed companies prefer to have a wide base of investors as this saves them from the price shocks arising from large scale buying/selling by a handful of investors. Thus, factors such as liquidity, stock price and the shareholder base are interlinked.
Bonuses and stock splits…
When it comes to improving the liquidity of a stock on the bourses, companies often count on two corporate actions—stock splits and bonuses.
When a company announces a stock split it increases the total outstanding shares by reducing the face value. For example, if you held one share of Rs 29,000 having a face value of Rs 10 and the company decides to reduce the face value to Re 1, you will now have 10 shares instead of 1 and the price per share may drop to 1/10th i.e. to Rs 2,900 at the time of the split. Later, if the same company announces bonus shares—a corporate action of capitalizing reserves—in the ratio 1:1, you might get 10 more shares but the price will drop to Rs 1,450 per share.
You see, in place of one share now there are 20 shares available for trading. If the company decided to issue a bonus in the ratio of 2:1 (i.e. 2 shares for every one held) the total number of shares available for trading could increase to 30.
Potential split and bonus candidates…
We analyzed BSE 500 stocks and found that 113 of these 500 stocks traded at a price higher than Rs 1,000 as on June 30, 2020. Of these, we separated companies that had a higher 6-month daily average traded value to average market cap ratio for the past 2 quarters, as compared to that of BSE 500. This left us with 91 companies.
Further, we considered other crucial data points, such the stock price (within the universe of stocks quoting at over Rs 1,000), the total number of non-institutional-non-promoter shareholders, and percentage of institutional holding.
We used the cut-off of 50,000 non-institutional-non-promoter shareholders and the institutional holding of less than 25%.
Potential split and bonus candidates?
Market cap and market price data as on July 03, 2020
Average traded value to average market cap ratio considers 6-month daily average (January-June) 2020
Promoter holding excluded
(Source: ACE Equity)
You might be surprised to see some names such as MRF and Page Industries missing in the list. However, their traded value to market cap ratio for the past 6 months is better than many stocks listed above. Moreover, their shareholding base is already diverse.
For instance, at Rs 28,041 crore of market cap, MRF had 62,848 non-institutional-non-promoter shareholders, whereas, at Rs 82,575 crore of market cap, Shree Cement had 39,264 non-institutional-non-promoter shareholders. In the case of Page Industries, the value of shares held by institutional investors is 39.5% of the total market cap.
Despite good financial and governance performance, if any company fails to attract investors due to higher stock price, it may consider the options of stock split or bonus issuance. Moreover, when a stock is included in a key index such as Nifty 50, higher liquidity becomes even more important.
That said; please don’t forget bonuses or stock splits don’t offer any direct benefit to shareholders but the improved liquidity helps enhance the price discovery.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.