Corporate Actions

Everything a company can do to its own shares — and the arithmetic that separates a change in value from a change in the number you are looking at.

The one question every corporate action asks

• Companies constantly do things to their own shares. Most of those events move the quoted price, and most of the moves are arithmetic rather than news.
• The discipline is to separate the two. A 3-for-1 split cuts the price by two thirds and changes nothing. A special dividend cuts it by the dividend and changes nothing. A rights issue cuts it and hands you something of exactly matching value.
• Financial media routinely reports the arithmetic as a crash. Knowing which is which is most of what this page is for.

Dividends: the cleanest example

• On the ex-dividend date the share opens lower by roughly the dividend. Nothing was lost — the cash simply left the company and is on its way to you.
• Key dates: declaration (announced), ex-date (buy after this and you do not get it), record (register checked), payment (money arrives). Only the ex-date matters for the price.
• Dividend policy is a signal, not a return. Cutting a long-standing dividend is treated as bad news out of all proportion to the cash, which is why boards defend them past the point of prudence — and why they all cut together when they finally do, as the dividend swap market discovers in every crisis.
• Index products referencing price indices never receive dividends at all. On a 3%-yielding market that is 3% a year the holder does not get — the single largest hidden gap in tracker certificates.

Splits and consolidations: pure relabelling

• Splits exist for tradability and, arguably, optics. The evidence that they create value is weak and the mechanism is entirely cosmetic.
• Reverse splits are the informative one. They are usually done to escape a delisting threshold, which means the price fell far enough to threaten one. The action is neutral; the reason for it rarely is.

Rights issues: the free option you must not ignore

New shares offered to existing holders at a discount, in proportion to their holdings. The theoretical ex-rights price is a weighted average, and the right is worth the gap between it and the subscription price:

Buybacks: the dividend that changes the denominator

• A repurchase returns cash by shrinking the share count. Earnings per share rise mechanically even if earnings do not move at all.
• Value is created only if the shares are bought below intrinsic value. Above it, the buyback transfers wealth from continuing holders to sellers — and companies have historically bought most heavily at peaks, when cash is plentiful and prices are high.
• The tax asymmetry is real in many jurisdictions: a dividend is taxed on receipt, a buyback defers the gain until you sell. This is the strongest honest argument for buybacks, and it is jurisdiction-specific.
• Watch the net count, not the gross spend. A large repurchase alongside large share issuance to employees can leave the count flat — the buyback funded compensation rather than returning capital. See employee stock options.

Takeovers: where the EPS argument does the most damage

An acquirer funding a deal with cash and stock changes both the numerator and the denominator of its own EPS. Whether the result is "accretive" depends mostly on the target's earnings yield against the acquirer's cost of funding — and says almost nothing about whether the price was sensible.

Spin-offs, demergers and the rest

• Spin-off: a subsidiary distributed to shareholders as a separate listed company. Your one holding becomes two; the combined value is what matters. Forced selling by index funds that cannot hold the smaller entity is a well-documented and recurring source of short-term mispricing.
• Special dividend: a one-off distribution, often after an asset sale. Same ex-date arithmetic, larger number.
• Tender offer: an offer to buy back a block at a fixed price, usually above market. Non-participants are diluted only if the price paid exceeds value.
• Scheme of arrangement / merger: your shares are exchanged for cash, stock or both, on terms you may get to vote on. Read what you receive, not the headline premium.

Practitioner rules

• Never act on a price move around a corporate action without checking the arithmetic first. Most of what looks like a collapse is a mechanical adjustment.
• Deadlines are absolute. Rights lapse, elections default, tender windows close. Corporate actions are the one part of investing where doing nothing has a hard cost.
• Read the use of proceeds, not the discount. Raising to invest and raising to survive look identical in the arithmetic and are opposite in meaning.
• Discount every EPS claim in an acquisition. Ask what the same deal does to return on capital and to the balance sheet, and check the funding assumption above.
• Adjust your own history. Charts and cost bases must be adjusted for splits and dividends, or every long-run comparison you make is wrong.