What do you think about the companies that offer shares instead of paying dividends. There is a bank in my country who has never paid dividends with money, but rather gave more shares to the shareholders, in average 16 shares for every 100 shares owned. Is there anything I should be aware of before buying some stocks for the long run?
Aside from doing due diligence on the bank itself, how the shares trade on the exchange (is there a market maker?), and the sector itself, the concept isn't a bad idea. Our family-owned bank went public, and in 3 years my return was 8x the original investment. YMMV.
I normally reinvest my dividends right back into shares from which it came. 16% back in shares is a pretty damn good ROI, unless the shares are garbage and are not really growing. What you should be aware of is the solvency of the equity. If they are going to 0, then it does not matter how many shares they give you. Also the long term growth prospects. Even if the shares tread water and don't grow you are still getting a decent return. BUT if the damn thing only loses value each 1/4 then you might end up losing money.
Are the shares new shares (ie. they just create and distribute them) or are they bought from the market first and then distributed to existing owners? In the first case, I don't see the point. As they hand out shares in equal amount to all owners, in reality you gain nothing. If you own 100 shares of a 1000 share company (10%) and they issue 16 new shares per 100. You will have 116 shares but the total amount of outstanding shares will be 1160 as everyone else also got their extra shares. You will still own 10% of the company. Now you will increase your ownership if it's the second case and those shares were brought from the market. But why go through the trouble and costs of redistributing the shares to existing owners instead of just cancelling them and getting the exact same outcome? Not to mention that some owners (depending on how they are taxed) might need to pay tax on the received shares.
Good question. I don't know this, but I can only assume we aren't speaking about new shares (because I would have heard of that) as they tend to buy back some shares from time to time. But I will check. The thing is that these shares can be traded almost immediately as Banca Transilvania (TLV on the BVB market) is one of the most traded stocks on the Bucharest Stockmarket.
I have always had a little wearisome feeling when it comes to stock options and things like that, because of course we all want to know what happens when the company goes under or goes through a little rough patch. It just seems like a way for them to avoid payments and just reinvest in themselves, which is just not right in my opinion. I guess it is better than nothing, though.
Yes, its a bonus, but it does seem to be taking the personal choice away from the investor and seems a little pushy. I would always prefer to be given the choice between more shares and dividends, otherwise it seems like additional investment is being pushed on me. Whenever I hear about that sort of thing I always think, whats the catch?
Oh yes this is a very good point I forgot about. Issuing new shares will just dilute existing shareholder value.
However, the investors can always share their shares if they want to almost immediately, especially for this bank I am speaking about. However, the downside is that they have to pay a broker's fee.
What country are you in? Do they give a reason for doing this? How often do they do this? Here in the US, companies have to go through all sorts of red tape to be able to distribute additional shares, and it is generally seen as not such a good thing - they usually offer additional shares to raise more money, and those new shares bring down the price of existing shares.
