2.2 Corporate Actions

Companies regularly make decisions that affect their outstanding stock. These corporate actions can change the number of shares you own, the price per share, or the income you receive. Understanding how these actions work is essential for the SIE exam and for anyone working with investors.

What Are Corporate Actions?

Corporate actions are events initiated by a company's board of directors that affect its securities. They can be mandatory (affecting all shareholders automatically) or voluntary (shareholders must choose to participate).

Types of Corporate Actions

Stock dividends: Mandatory; Reward shareholders without cash outlay

Stock splits: Mandatory; Make shares more accessible to investors

Reverse splits: Mandatory; Increase share price, meet exchange requirements

Cash dividends: Mandatory; Distribute profits to shareholders

Rights offerings: Voluntary; Raise capital, give existing shareholders first opportunity

Mergers/acquisitions: Varies; Combine companies, expand operations

Stock Dividends

A stock dividend is a distribution of additional shares to existing shareholders. Instead of paying cash, the company issues new shares proportionally.

How Stock Dividends Work

If a company declares a 10% stock dividend:

- You owned 100 shares, you now own 110 shares

- Your percentage ownership stays the same

- The total market value of your holdings stays approximately the same

- Each share is worth less because there are more shares outstanding

Important: Stock dividends are generally not taxable when received. You only pay taxes when you sell the shares.

Stock Dividend vs. Cash Dividend

What you receive: Stock Dividend - Additional shares; Cash Dividend - Cash payment

Company cash impact: Stock Dividend - None; Cash Dividend - Reduces cash reserves

Your ownership %: Same for both

Tax treatment: Stock Dividend - Not taxable when received; Cash Dividend - Taxable as ordinary income

Price adjustment: Stock Dividend - Share price decreases; Cash Dividend - Share price decreases on ex-date

Stock Splits

A stock split increases the number of shares outstanding while proportionally reducing the price per share. The company's total market value remains unchanged.

Forward Stock Splits

Common split ratios and their effects:

2-for-1: 100 shares become 200; $80 price becomes $40

3-for-1: 100 shares become 300; $90 price becomes $30

3-for-2: 100 shares become 150; $60 price becomes $40

Why Split? Companies split their stock to make shares more affordable for retail investors. A stock trading at $500 may be intimidating for small investors, but after a 5-for-1 split at $100, the same company becomes more accessible.

Calculating Split Results

To calculate shares and price after a split:

- New shares = Old shares x (first number / second number)

- New price = Old price x (second number / first number)

Example: 200 shares at $150 undergo a 3-for-2 split

- New shares: 200 x (3/2) = 300 shares

- New price: $150 x (2/3) = $100 per share

- Total value before: $30,000; Total value after: $30,000

Reverse Stock Splits

A reverse stock split reduces the number of shares while increasing the price per share. This is the opposite of a forward split.

Why Do Reverse Splits?

Companies typically do reverse splits when:

- Share price has fallen below exchange minimum requirements

- They want to attract institutional investors who avoid low-priced stocks

- They want to improve the company's image (avoid "penny stock" label)

Reverse Split Example

1-for-10: 1,000 shares become 100; $2 price becomes $20

1-for-5: 500 shares become 100; $3 price becomes $15

1-for-4: 400 shares become 100; $5 price becomes $20

Warning Sign: A reverse split is often viewed negatively because it typically occurs when a company's stock price has fallen significantly. While the action itself does not change company value, it can signal underlying problems.

Important Dividend Dates

When a company declares a cash dividend, four key dates determine who receives payment:

The Four Dividend Dates

Declaration Date: Board announces dividend amount and dates; Determined by Board of directors

Ex-Dividend Date: First day stock trades without dividend; Determined by Exchange/FINRA

Record Date: Company determines shareholders of record; Determined by Board of directors

Payment Date: Dividend is actually paid; Determined by Board of directors

The Ex-Dividend Date Rule

Since the U.S. moved to T+1 settlement (May 2024), the ex-dividend date is usually the same day as the record date. Under T+1, trades settle in one business day, so:

- Buy before ex-date: Receive the dividend (you settle by record date)

- Buy on or after ex-date: Do NOT receive the dividend

The ex-dividend date is set by FINRA/NYSE based on settlement rules, not by the company.

Price Adjustment: On the ex-dividend date, the stock price typically drops by approximately the dividend amount. This is a technical adjustment reflecting that new buyers will not receive the upcoming payment.

Example Timeline (T+1 Settlement)

Declaration: November 1; Stock Price - $50.00

Ex-dividend / Record: November 15; Stock Price - $49.50 (opened down $0.50)

Payment: November 30; Dividend paid to shareholders of record

Note: Under T+1 settlement, the ex-dividend date for a regular cash dividend is usually the record date itself; if the record date is not a business day, the ex-dividend date is the business day before it. To receive the dividend, buy before the ex-dividend date. Dividends of 25% or more of the stock's value follow special rules.

Rights Offerings

A rights offering gives existing shareholders the right to purchase additional shares at a discounted price before a public offering.

How Rights Work

1. Company announces rights offering

2. Existing shareholders receive rights (typically 1 right per share owned)

3. A certain number of rights plus cash allows purchase of new shares

4. Rights are often transferable - can be sold to others

5. Rights have an expiration date

Rights Example

- Rights ratio: 5 rights + $40 = 1 new share

- Current market price: $50

- Subscription price: $40 (the discount)

- You own 500 shares, you receive 500 rights, you can buy 100 new shares at $40

Key Takeaways

- Stock dividends and splits change share count but not total value

- Forward splits make shares more affordable; reverse splits increase price

- The ex-dividend date determines who receives dividends

- Rights offerings let existing shareholders buy shares at a discount

- Always calculate the impact on shares, price, and total value