Investors are still chasing companies that announce bonuses and stock-splits, irrespective of the state of the market. Despite the meltdown since May, there has been a flurry of announcements on this front. Over the past month, Unitech announced a 10:1 bonus offer and Nagarjuna Construction gave a 1:1 bonus, while Mahindra Gesco and Voltas are considering stock-splits.
Theoretically, stock-splits and bonuses are wealth-neutral. However, this hypothesis does not apply in the real world, as there is heightened activity on the price front around these events. Affordability and liquidity, generally advanced as the key rationale for such announcements, drive stock price trends. For instance, soon after ITC considered a bonus offer in May 2005, trading volumes in the counter zoomed from 80,000 shares in April to about 1.3 lakh shares by June. A similar pattern was observed with the counters of Jubilant Organosys and IVRCL, which came out with such announcements in the first quarter of 2006.
In 1999 and 2000, stock-splits and bonus announcements were generally restricted to frontline and mid-cap stocks. However, since 2003, the fancy for such announcements has also spread into the small-cap space, as reflected in the surge in such actions by companies that quote at less than Rs 100.
Price action
The sample data suggest that the wealth-neutral theory should be confined to the books. In the real world, significant price action accompanies such announcements. In a bull market, investors stand to gain from both bonuses and stock-splits, but in a bear phase, stock-splits acquire greater fancy.
To test the price action surrounding bonuses and stock-splits, we considered all such actions made by BSE-500 constituents since 2000. The price action was examined one-month before and three months after the date on which the stock went ex-bonus/split for the study. The key findings include:
Bear Phase
Despite the theory of bonuses scoring over stock-splits in terms of transparency, the scales are tilted in favour of stock-splits in a bear phase. In a bear market, investors can avoid making decisions on a bonus announcement, as significant value erosion is the norm on many an occasion. The performance of stocks that went through a split augurs well for a compelling investment as most of them not only managed to stave off the negative sentiment but also generated an average return of about 8 per cent in three months following the announcements.
The market appears to have a fancy for stock-splits in a bear phase. Stocks that were split between January 2000 and April 2003 gained more than 6 per cent on the ex-date over a month earlier. They also maintained their gains, with quite a few stocks making advances during the ensuing period. The gains would have been greater if it had not been for the IT bubble in 2000, which muddled the picture.
Among the significant gainers in the bear run were FDC and Jubilant Organosys, which went ex-split in 2002. Jubilant, which started at Rs 210 a month before ex-date, logged a 39 per cent return in the run-up to the effective date and a further 4 per cent rise at the end of three months.
Bonus announcements appear to have failed to curb negative sentiment in the bear market. Most of the stocks that went ex-bonus during this phase maintained a steady losing streak; on an average, they lost about 8 per cent in the first month and a further 4 per cent for the next two months. The dips, however, were shallower in the last phase of the bear run. Notably, Mirza International, Aurobindo Pharma and Mascon Global, which went ex-bonus in 2000, suffered significant value erosion.
Bull Phase
In the bull phase, the market was enthralled by such corporate actions. In a bull market, one can consider investing with a three-month horizon on either a bonus or a stock-split announcement, as the pay-off is attractive.
Investing after the ex-date may also be considered within a two-month period. Investors would be better off with bonus announcements which tend to be more value-accretive than stock-splits.
Stocks that came out with bonus announcements were in for a double bonanza as both liquidity factors and a positive sentiment helped them ramp up value. On about 80 per cent of the sample, the stock values on the ex-date were higher than that a month earlier and maintained the streak for the following three months.
Gujarat NRE Coke, which offered bonus shares twice between May 2003 and April 2006, recorded stupendous gains on both occasions. Havells India announced a 1:1 bonus offer in July 2005, when the stock was trading at Rs 384.
Since the announcement, it recorded a 90 per cent rise over a four-month period.
Stock-splits also followed a similar trend; on only 15 per cent of these instances, value erosion took place on the ex-date after the announcement of the stock-split. Investors may stay away from stocks whose value erodes in the run-up to the ex-date as they tend to lose further.
Those that ramped up gains stayed flat for the following three months, while the ones that registered modest gains on the ex-date gained considerably in the following three months. Bajaj Hindustan, Kirloskar Brothers and Carborundum Universal were among the significant gainers.
Quite a few companies also came out with stock-split/bonus combo announcements. Such stocks had a distinguishing feature; most of them generated significant returns on such announcements. Though their values declined for the ensuing two months, they more than recouped in the third month.
Liquidity front
Stock-splits and bonus offers enhanced liquidity for most stocks that traded above Rs 1,000. Absolute volumes for these stocks were up significantly. However, liquidity fell for Mascon Global, Aurobindo Pharma, Sterlite Industries and i-flex solutions.
All four were part of the bonus brigade, with low adjustment factors. The price action in a bear market appears to be a factor of volume activity (adjusted).
A significant jump in activity can be noticed in stocks that went ex-split. Heightened liquidity was evident in Sonata Software, Dabur India, SKF and Asahi India Glass, which had an adjustment factor of 10 (an adjustment factor of 10 denotes that 10 shares after the ex-date is equivalent to 1 share, prior to the bonus or stock-split).
Bonus announcements, however, failed to generate similar interest. Adjusted average volumes of stocks in the case of bonus dipped by about 50 per cent in the first and second months from the ex-date. Even in absolute terms, the picture looked bleak, with only a handful of companies having a consistent record of higher volumes. Energy companies Kochi Refineries and BPCL were among the notable stocks with enhanced liquidity.
Though bonus actions helped boost liquidity in the bull market, this was not the case for all stocks. Liquidity levels were higher in only about 70 per cent of such cases. Significant value erosion was a common feature in stocks for which liquidity dried up. Notable among them were Jubilant Organosys, Alembic and Marico. Higher adjustment factors helped stock-splits score over bonus offers. On about 90 per cent of the occasions, volume surges were recorded in such stocks.
SOURCE : BL
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