Investors almost always react positively to the word “bonus,” as this seems to send a signal that the company is both prosperous and generous. Be it bonus dividends (usually known as “special dividends”) or a bonus share issue, investors usually view such companies in a positive light and get the impression that the company must be doing something right.
I decided to analyse this phenomenon a bit more closely. Does the issuance of bonus shares imply that a company is performing well? And can that performance be sustained over an extended period of time? Or should investors become warier when companies undertake such corporate actions given that it may signify a peak in their business cycles?
Our FREE SGX stock pick!
Below are two examples of companies that have issued bonus shares. The share price of each company was tracked post-bonus issue to see if such issues really did benefit the companies and shareholders alike.
1. AEM Holdings Limited
AEM Holdings Limited (SGX: AWX) is a provider of solutions in equipment systems, precision components, and related manufacturing services across various industries. The group has four manufacturing plants located in Singapore, Malaysia, China, and Finland.
The group announced a 1-for-3 bonus issue of shares in February 2018, as the group delivered record revenue and profitability for FY 2017. Revenue increased twofold while net profit jumped a massive 576% year-on-year. The shares were trading at a split-adjusted price of around S$1.57 around the date of the ex-bonus but they are trading at around S$1.15 currently.
In its most recent Q2 2019 earnings report, the group announced a 34.8% year-on-year increase in revenue and a 65.4% increase in net profit.
2. MTQ Corporation Limited
MTQ Corporation Limited (SGX: M05) provides engineering solutions for oilfield equipment, including repair, maintenance, and rental operations. The group is the authorised partner for some of the world’s largest OEMs in drilling equipment.
Back in July 2013, MTQ declared a 1-for-4 bonus issue and in July 2014, the group declared a 1-for-5 bonus issue. The group declared these bonus issues as it was enjoying a boom in revenue and profit thanks to high oil prices. However, the oil-price collapse from 2014 to 2018 brought everything to a screeching halt, and the group has since reported four consecutive years of losses (from FY 2016 to FY 2019 — the group has a 31 March year-end).
The share price has also fallen from a high of S$1.00 (adjusted for both bonuses) to the current S$0.22. Note that the group had also announced a 2-for-5 rights issue at S$0.20 per rights share in January 2018.
Bonus issues cannot foretell the future
The two examples above provide a cautionary tale for investors — companies usually declare bonus issues when their businesses are enjoying significant improvements in revenue, profit, and cash flow. Note that both companies featured above have businesses that are linked to cyclical industries (electronics and oil and gas, respectively), which also features as an additional risk.
Bonus issues, therefore, tell the investor that past performance has been splendid but it does nothing to foretell the future. These bonus issues do not always benefit the companies and shareholders involved, and investors should view them merely as cosmetic exercises.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of AEM Holdings Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.