If you’ve been keeping up with our coverage of public listed company shares issues welcome to the third instalment where we will talk all about the bonus issue. If this is your first time coming across you can catch up by reading the article that outlined the various share issues and the rights issue article. You may find the bonus share issue also referred to as a stock split. While the two can have different characteristics we can look at them as the same thing for what we need to learn here.
In a bonus issue, a company gives the existing shareholders additional free shares for the shares they currently hold. There are a few reasons a company may do this. A good example is where a company is a cash strapped. Instead of offering a dividend, the company can give bonus shares to shareholders. The shareholders pay nothing for the shares but the company pays for the shares through reserves to capitalise the shares. This transaction is at book value. The shareholders are sated as they can sell the additional shares in the market or hold for future dividends. In this situation, the share capital will increase but the overall value of the business will not as the shares were financed from internal sources. The terminology used in bonus issues would be something like a 1 for 4 bonus issue, meaning a shareholder gets 1 share for every four they hold.
He terminology stock split comes to form another sometimes intended consequence of bonus issues. When share values get very high they get really hard to sell or you may have a situation where investors want to sell off some of their capital gains but hold some of the shares still. Let’s look at the ZSE where online platforms like C-Trade and ZSE Direct allow you to buy and sell in multiples of 100. Let’s look at Lafarge which started in 2021 at ZWL$8.00 per share. If you’d bought 100 shares then that would have cost you ZWL$800 and would now be worth around ZWL$9800 (ZWLS98 per share). You may want to sell off some of these shares to take profit but given those rules, you would have to sell all 100. Say Lafarge introduced a 4 for 1 stock split you would now have 500 shares and could sell off 200 and keep 300. In theory, these shares would reduce the value to ZWL$19.60 per share. More on this later.
The ZSE does provide for bonus issues in its listing rules section 5.57. One key thing about bonus issues is that they are not supposed to change the composition or holdings within that class of shares. In a bonus issue if you have 10% of the shares of the company before the issue you should hold 10% of the shares after the issue. You can see other rules concerning bonus issues in the ZSE listing rules.
As discussed before bonus issues are non-dilutive. We have to remember to separate two issues here; the proportion of shares held and the value of shares held. Firstly let’s look at the proportions.
If a company has 5 shares and 5 shareholders holding 1 share each, a bonus issue would change their proportions. So a 1 for 9 bonus issue would award each shareholder 9 bonus shares. Each holder would still hold 20% of the shares; 10 out of 50 after the bonus issue.
In the same bonus issue as before lets, the market value of shares was $10 per share meaning the market capitalisation (total value of issued shares) was $50 (5*$10 per share). The new market value of the shares in the market (before any other transactions) is $1 per share ($50/50 shares).
There are examples of bonus issues on the ZSE we can look at. Cassava Smarttech issued bonus shares to shareholders upon its 2018 listing on the Zimbabwe stock exchange. Dawn Properties, which was remerged with African Sun Limited earlier this year carried out a bonus issue in 2005 soon after it was separately listed. These two make good case study reading on bonus share issues in Zimbabwe.