Public offers, options and buy-backsSunday, November 28, 2021
There are many ways for shares to be increased or reduced in a company. This can vary from a share buy-back, stock split, reverse stock split, initial or additional public offerings or a stock option plan. Today's article will go through these various methods and how they benefit investors in more ways than one.
An initial public offering (IPO) is when a private company's shares become available to the general public for the first time. This may involve the company issuing new shares as part of the offering or an existing owner selling shares for the transaction. The issuance of new shares increases the number of shares in circulation and allows for the company to use that new capital (money) to further its business operations. In the case of an offer for sale, the existing investor benefits by being able to partially or fully exit his/her investment. If the investors owns any shares after the IPO, he/she can benefit from the price discovery of the investment which will now be publicly traded on a stock exchange.
An example of a company going this route is Future Energy Source Company Limited (Fesco). In April, the company was able to raise $240 million to develop its business while the existing owners were able to collect $160 million through this sale. Although Fesco hasn't paid a dividend, the company's price has increased by 243 per cent to $2.74 since listing at $0.80. This not only increased the wealth of those who bought at the IPO, but for the original owners whose equity stake has a market established value.
An additional public offering (APO) is where a publicly listed company will raise additional capital to expand the business and recalibrate its balance sheet. Unlike a rights issue which is exclusively to shareholders at a record date with some exceptions, an APO allows members of the public to buy into a company at a price which might be below the price it trades at on a stock exchange. This results in additional shares being issued which dilutes shareholders ownership, but generally results in investors benefiting in the future from a larger company. Barita Investments Limited's stock price is up by 15 per cent relative to the APO price of $80.
A stock split is where the number of shares is increased by a factor with the stock price decreasing by that factor. This is usually done when there is possibly a low supply of shares in the market or the price has become 'expensive' to investors which might see reducing trading for that stock where there is limited trading activity. An example of this is with Caribbean Flavours and Fragrances Limited (CFF) last year where there were days of no trading with the stock. When the board announced a consideration to do a 10 to 1 stock split in August, the stock increased by 58 per cent in the following week. If someone owned 1,000 shares of CFF at $19.39 by the split date, they'd now own 10,000 shares with the market price being $1.94 after the split. Apart from there being more shares available, shareholders benefit as the stock price tends to move upwards much easier on improving results.
A reverse stock split is simply the reduction of shares in the company with the price increasing. Thus, if you owned 100,000 shares at $10 before a 1 to 10 split, you'd now own 10,000 shares at $100. Although this doesn't happen in Jamaica, it is something that does occur in overseas markets.
A share buy-back is simply where the company buys back the shares from the market and cancels them after the transaction. This reduces the number of shares in circulation and improves the existing ownership of shareholders. Kingston Properties Limited has a share buy-back plan where they bought back 51,244 shares in 2020 and cancelled them. JMMB Group Limited's ownership in Sagicor Financial Company Limited (SFC) has improved from 22.50 per cent to 23.22 per cent over two years due to SFC's buy-back programme.
A stock option plan is simply where the company can set aside a specific portion of authorised unissued shares to be bought or issued to staff or directors as part of a compensation package. Some companies establish trusts where the shares are bought on the open market and allocated to employees later. Though this will dilute general shareholders, it works as a great tool for companies to retain great talent through equity over cash. It also provides the company with cash it can use where staff pay for the shares.
Jamaican Teas Limited is one company which has a stock option plan. One director was able to purchase 12 million shares in May at a reduced price of $0.58 compared to the market price of $4.02. For staff, they can purchase the shares at a 10 per cent discount to the market price of when they exercise the plan. They also have the option to get interest free loans for up to three years to purchase these shares. As a staff member of a company with a share option plan, it creates an opportunity for shares to be purchased at a discount and compound wealth as time progresses.
— David Rose