What is a Bonus Issue?
A bonus issue is an offer of free additional shares to existing shareholders. They’re basically gifts to shareholders of the company, rewarding you and me with additional shares at no cost.
The bonus shares are issued and paid out of the retained profits of a company. They’re issued as a ratio, based on the number of shares held by the shareholder. As an example below, Cypark handed out bonus shares at a ratio of 2 : 1. For every 1 share held, shareholders get 2 bonus shares for free.
Why are Bonus Shares Issued?
- To reward shareholders
- Boost investor sentiment and market confidence
- Increase liquidity
- Adjust the stock price to a reasonable range
As an existing shareholder, you may immediately sell the bonus shares the moment they are issued. This is why companies sometimes issue bonus shares in lieu of cash dividends. Or if you’re investing in the company for the long term and do not have immediate liquidity needs, you keep your increased shareholding.
It is however important to note that a share bonus issue does not involve cash flow. It increases the company’s share capital but not its net assets. It does not impact you as a shareholder materially.
In addition to this, a bonus issue increases the number of outstanding shares in the market. This in turn, will result in an instant decrease in the stock’s price, making the stock more affordable for retail investors.
What Should You Do with Your Bonus Issue
If like me, you’re a long term investor in the company and business, you’ll want to do nothing with the additional shares from the bonus issue.
Selling the bonus shares will lower your percentage stake in the company, giving you less dividends and fewer shares in terms of percentage in the stock. If this is difficult to understand, imagine every other shareholder, like you, receives the same bonus shares. If you sell yours and nobody else sells theirs, your holdings are less compared to everyone else.
So if you’re investing in the company for the long term, do nothing with the bonus issue, and be happy.
Difference Between a Bonus Issue and Stock Split
Both have many similarities as well as differences. Stock splits only serves one purpose – To increase the number of shares. Ie. To adjust the share price of the company to a lower level.
Many Malaysian investors still believe a company like Nestle whose share price is RM145 per share is “expensive”. Investing RM10,000 into Nestle or a low price share is the same thing. You’re investing RM10,000. End of story.
When a stock is split, there is no change in the company’s cash reserves. In contrast, when a company declares a bonus issue of shares, the bonus shares are paid for out of the accumulated profits of the company, depleting reserves.
Similar to a bonus issue, if you do not have immediate liquidity needs, you should just hold on to your split stocks to maintain the status quo in terms of your percentage holdings in the company.
Warrants, Free or Otherwise
Above is a 2020 example of Scientex’s announcement for a bonus issue plus free warrants.
In the example, as an existing shareholder, you receives two bonus shares for every one existing share held. In essence, splitting one share into three.
And in this particular instance, the company is also awarding free warrants. One for every five existing shares. However, it is important to note that the bonus shares are not entitled to the free warrants.
The warrants in this case are given as a bonus for investors, you can keep it to exercise at a later date or sell immediately.
Now, I won’t be touching the warrants you see on the exchange where small price swings can earn you big amounts of money or lose you the shirt on your back. If you’re new and just starting to invest, please do not touch those.
I hope this clears the air on bonus issues, stock splits and a little on warrants.
TL;DR – Bonus issues are a plus for the company, stock splits are neutral. Do nothing with both if you’re investing in the company for the long term.