InvestorQ : As a shareholder, how should I decide what suits me better; bonus or stock split of shares?
Niraja Mehta made post

As a shareholder, how should I decide what suits me better; bonus or stock split of shares?

Answer
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Rutuja Nigam answered.
1 year ago


How much can an investment of Rs.10.000 in an equity share grow in 38 years? Frankly, there are no clear answers. But if the company in question was Wipro then an investment of Rs.10,000 in 1980 would have grown to Rs.630 crore in 2018. That is true! If you add up the impact of all bonuses and stock splits in the last 38 years, then your investment in Wipro would have actually multiplied into a mind-boggling number. Here is how!

Year

Bonus / Split

Ratio of Bonus / Split

Year Beginning shares

Year Ending shares

1980

-

-

0

100 shares (Bought )

1981

Bonus

1:1

100

200

1985

Bonus

1:1

200

400

1986

Stock Split

100 to 10 FV

400

4,000

1987

Bonus

1:1

4,000

8,000

1989

Bonus

1:1

8,000

16,000

1992

Bonus

1:1

16,000

32,000

1995

Bonus

1:1

32,000

64,000

1997

Bonus

2:1

64,000

1,92,000

1999

Stock Split

10 to 2 FV

1,92,000

9,60,000

2004

Bonus

2:1

9,60,000

28,80,000

2005

Bonus

1:1

28,80,000

57,60,000

2010

Bonus

2:3

57,60,000

96,00,000

2017

Bonus

1:1

96,00,000

1,92,00,000

At the current market price of Wipro of Rs.293 the value of your holdings today would be approximately worth Rs.563 crore. Effectively the combination of bonuses and splits has helped your investment of Rs.10,000 in 1980 to grow to a whopping Rs.563 crore in 2018. Can we say that bonuses and splits have helped Wipro to create wealth? The answer is clearly “No”. Both bonuses and splits are value neutral and it is the actual financial performance of Wipro that has helped create wealth. What bonuses and splits have done is to keep the stock price of Wipro within an acceptable range so as to elicit investor interest.

Both bonuses and splits result in dilution of the equity base due to increase in the number of shares outstanding. However, since the number of shares goes up and the price goes down proportionately, the net value impact is neutral. So, how do we distinguish between bonus issue and stock split? Why does a company issue bonus shares? Why does a company split its shares? More importantly, when are stock splits and stock bonuses used by companies and how do they benefit shareholders of the company?