When you’re investing in companies (as opposed to managed funds and exchange-traded funds), you start to see something new: corporate actions.
These are exactly what they sound like—actions a corporation takes. The reason you hear about them is that corporations tell their shareholders whenever they do something that may affect the share price. After all, as a part-owner of a company, you deserve to know about big decisions that might affect your investment.
Corporate actions are split into two main categories:
mandatory actions, where shareholders have to participate
voluntary actions, where shareholders get a choice about whether or not they participate.
Public companies are required to tell people about their corporate actions. For example, the NZX have to do this through the NZX Market Announcements at least five business days before the action happens, so shareholders have all the information they need about their investment.
We thought we’d run through some of the more common corporate actions, as well as a few we’ve seen in the last few months.
Dividends—money in your pocket
If you’ve been investing in managed funds or exchange-traded funds (ETFs), then corporate actions may not be as new to you as you may think. That’s because one of the more common corporate actions is when a company gives some of its profits back to its shareholders, in the form of dividends. So if you’ve ever received a dividend, you’ve taken part in a corporate action!
It’s usually given as an amount per share, so the more shares you own, the higher your dividend is. We’ve written more about dividends here.
Dividends are a mandatory action—the company is going to give you money whether you want it or not! What you do with that money, of course, is up to you. You can choose to reinvest back into the company by buying more shares if you want.
Rights issues and share purchase plans
Companies tend to issue shares in order to raise money. Rights issues and share purchase plans are when companies do this by giving their existing shareholders the opportunity to buy more shares.
This is usually at a lower rate than the current share price, because otherwise there’s no real reason to participate in a rights issue—you could just buy your shares from another shareholder on the share market. As an example, Tower Insurance had a rights issue in September 2019 and a business travel booking service called Serko had one in October 2019.
The main difference between a rights issue and a share purchase plan is in how many shares you can buy. In a rights issue, you can buy shares in proportion to the shares you already own. For example, a company might say that you can buy 1 new share for every 4 shares you already hold.
Share purchase plans (SPP), on the other hand, are usually capped at $15,000. This means that if you own heaps of shares, it’s hard to avoid dilution. If your percentage of the total company is worth more than $15,000, then you end up owning a smaller percentage after the SPP than you did before the SPP. In other words, your investment is worth a bit less.
But if you don’t own heaps of shares, both of these can be a good way to get more shares, at a discount, without much of a downside.
Acquisitions—buying another company
An acquisition is when a company buys another company. The second company might cease to exist entirely, or it might operate on its own, but give all its profits to the first company.
If a company you’ve invested in announces an acquisition, you can essentially read this as the company growing. All of the acquired company’s customers are now the bigger company’s customers, and all of its profits are now the bigger company’s profits.
And if the company you’re invested in gets acquired, this is generally good news! Companies acquire other companies using cash, shares or both. So you’ll either get cash for your shares, or you’ll get some shares in the larger company (which now includes the company you initially invested in). What’s more, you’ll usually get more for these shares than you would have got selling them on the share exchange, because companies need to pay a premium to get enough shareholders to sign off.
Acquisitions are sometimes mandatory, but not always. In some cases, companies will have their shareholders vote on a decision to acquire another company, or get acquired by another company.
Mergers—when two become one
Mergers are closely related to acquisitions, but with one big difference: rather than have one company swallow up another one, a merger is two companies combining. When this happens, the two companies effectively stop existing, and they get replaced with a third, bigger company.
If you’re a shareholder in a company that undergoes a merger, your shares will probably (although not always) become more valuable. After all, they’re now shares in a much bigger company than they were before! Mergers are mandatory for shareholders.
Splits and consolidations
Sometimes, a company may want to increase or decrease the price of each share, without changing the overall value of the company. Splits are a really good way to do this.
When a company has a share split, it increases the number of shares being traded, but reduces the price of each share. So, if you had one share worth $100, you would now have 2 shares worth $50 each. Your overall investment is the same but there’s more liquidity (liquidity is how easy it is to turn your investment back into cash!).
However, a share split can increase the overall share price in the short term. When each share becomes more affordable, demand for those shares can increase. This means there are more people buying shares—which, of course, means the share price goes up as demand for shares goes up. This is generally a short-term effect, as the underlying company hasn’t changed its value.
Another version of this is called a consolidation. A consolidation is essentially a split, but in reverse. Instead of more shares with lower value per share, you get fewer shares, with a higher value per share.
Just the beginning
These corporate actions are just some of the more common corporate actions. There are lots of other actions that companies can take, that they have to tell you about. Keep an eye on the shares you own for any new corporate actions!