Stock dividend definition
/What is a Stock Dividend?
A stock dividend is the issuance by a corporation of its common stock to shareholders without any consideration. A company usually issues a stock dividend when it does not have the cash available to issue a normal cash dividend, but still wants to give the appearance of having issued a payment to investors.
Example of a Stock Dividend
For example, when a company declares a 15% stock dividend, this means that every shareholder receives an additional 15 shares for every 100 shares he already owns.
Impact of a Stock Dividend on Market Value
In reality, the total market value of a company does not change just because a company has issued more shares, so the same market value is simply spread over more shares, which likely reduces the value of the shares to compensate for the increased number of shares. For example, if a company has a total market value of $10 million and it has 1 million shares outstanding, then each share should sell on the open market for $10. If the company then issues a 15% stock dividend, there are now 1,150,000 shares outstanding, but the market value of the entire firm has not changed. Thus, the market value per share after the stock dividend is now $10,000,000 / 1,150,000, or $8.70.
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Advantages of a Stock Dividend
If a company's shares are selling for such a large amount on a per-share basis that it appears to be keeping investors from buying the stock, a large stock dividend might sufficiently dilute the market value per share that more investors would be interested in buying the stock. This might result in a small net increase in the market value per share, and so would be useful for investors. However, a high stock price is rarely an impediment to an investor who wants to buy stock.
Disadvantages of a Stock Dividend
There are two problems with stock dividends, which are as follows:
Uses authorized shares. A stock dividend may use up the remaining amount of authorized shares that a corporation is allowed to use. For example, the shareholders may have initially authorized 15 million shares, and 10 million shares are outstanding. If the company issues a 50% stock dividend, this increases the number of shares outstanding to 15 million shares. The shareholders will now have to authorize more shares before the company can issue any additional stock.
Does not provide liquidity. Stock dividends do nothing to provide shareholders with any liquidity, unless the shares are traded on a stock exchange (which is not likely in these situations). The result may be pressure from investors to provide actual cash dividends.