What is a stock dividend?

Earlier today, I noticed a lot of investors panicking over DNL’s stock price. Yestrday, DNL’s price closed on 21.65 Php per share. Today, the price after market recess closed to 10.74.

So what happened?

D&L paid out its stock dividends today.

So what is a stock dividend?

A stock dividend is a type of dividend paid out to its shareholders in a form of a stock. So why did D&L paid out a stock dividend instead of a cash dividend?

There are 3 reasons why. The first reason is to simply increase its outstanding shares. The 2nd reason is a strategy to move their retained earnings to paid-in-capital. And the 3rd reason is to effectively minimize cash distribution among the shareholders.

Can you explain a bit more further what a stock dividend is?

Let’s say that a company has 1 million worth of shares outstanding and the company declares a 50% stock dividend, what happens is that after the dividend declaration, the company has now 1.5 million shares. Now, let’s say I’m an investor who owns 10,000 shares of the company. After the dividend declaration, I now will own 15,000 shares; that’s an additional 5,000 shares or 50% of my equity.

That’s great! More shares equals more money right?

Not really. You see, even if the company paid you 50% stock dividend, it really didn’t change your equity in the company. Before the company paid its stock dividend, your equity is 1% (10,000 / 1,000,000 = 0.01). After the stock dividend, you still have 1% (15,000 / 1,500,000 = 0.01). Since the company didn’t really change after the stock dividend, the market value should also not change. If the company is worth 1 million pesos before the stock dividend, then the company is still worth 1 million after the stock dividend. However, the share price market value will decrease to compensate for the increase in the number of shares as explained in the equation below.

Share price before stock dividend = 1,000,000 Php / 1,000,000 shares = 1.00 Php price per share

Share price after stock dividend = 1,000,000 Php / 1,500,000 shares = 0.667 Php price per share (approx.)

To explain a bit further, if you own 10,000 shares with a share price of 1.00 Php totaling to 10,000 Php before the stock dividend, you will now own 15,000 shares at 0.0667 Php price per share totaling to still 10,000 Php.

I get it, It’s the same as a stock split right?

No. While they look similar on most cases, the difference is that a stock dividend retains its par value. A stock split on the other hand, reduces the par value of the stock depending on the type of split announced. To illustrate, If a share has a 1.00 Php par value and there are 1,000,000 shares the, total par value would be 1,000,000 pesos.

Total par value = 1.00 Php x 1,000,000 shares = 1,000,000 Php

A stock split of 2-for-1 will make the share 0.50 Php par value and 2,000,000 shares but the same total par value would be the same.

Total par value = 0.50 Php x 2,000,000 = 1,000,000 Php)

Ok now I understand. So what’s in it for me?

If a company continues to give stock dividends on a regular basis, these significant increase in the number of shares will add up over the years to come. As long as the company you invested in continues to grow in value, the share price will also continue to grow and the additional shares accumulated can be sold at a substantial gain. On the other hand, this is not good for short-term investors looking for immediate income because they would more likely need the cash flow instead of the stock dividend for purchasing needs. It really depends on the investment plan you are following. If you are a long-term investor and you know that the company you own is undervalued, it would be the best time to buy more shares because owning more shares provides a more significant value in a long-term investment plan.

Happy investing!