Suppose I hold (for argument’s sake) about $10,000 of stock in a private company. The company is thinking about listing on the stock exchange at some point in the next year or so. Shareholders aren’t being told much more than that at the moment, because apparently there’s rules against doing so.
Would there be a normal expectation that dividends would be paid? I understand there’s no legal requirement to do so, but it’s considered usual, right?
If so, how would I best guestimate what they might be? Is there a correlation between share price/worth and dividends?
Normally when I private company becomes listed, the company is issuing “new shares” of the company. Some of the new shares will be sold to the public to raise new capital that the company intends to use for growth, expansion, etc. Other new shares will be issued to the existing shareholders to replace their old shares. These new shares become valued at what the market says they are worth as it is now a public company.
Just because you paid $10,000 for your shares, doesn’t mean that’s what your new shares will be worth. The may be worth more. They may be worth less. You’ll have to wait until after the IPO to see how the market values them.
With regard to dividends, there is no requirement for public companies to pay dividends. Many do because it certainly effects their stock price, but it is not a requirement. Dividends are normally paid to allow the shareholders to earn a cash return. The average S&P 500 dividend yield has been aroung 4.3%. So assuming that the market value of your stock stays around $10,000, you could reasonably expect to receive dividends of approximately $430 a year.
Most companies are expected to pay dividends at some point, but young companies usually put their resources into growth instead, and this could continue for several years after your company goes public. When it does start to pay dividends, the amount will be determined by the company’s income, free cash flow, and competing needs for cash, and not by what you paid for your shares. Causality works in the opposite direction: The trading price of your shares will be strongly affected by the amount of the dividend.
Contrary to what Omar Little indicated, no new shares will be issued to the existing shareholders to replace their old shares. Instead, your shares will be considered restricted shares, and not freely tradable, for a period of time.
I think this depends on the situation. I have heard of both scenarios.
As for the OP’s dividend situation… the past history of a company is a better predictor for dividends than anything else. Even companies of similar size in similar industries can have very different policies regarding dividends (Apple and Microsoft, for example).
Going public doesn’t say that much about whether they’ll pay dividends or not. If they’ve been paying dividends, I would expect them to continue to do so. If they have not been paying, then I wouldn’t expect any.
I’ve worked for 2 companies that went through an IPO. To be precise, the SHARES you have usually are not restricted, but YOU are restricted from selling them for the “lock up” period. This period can vary, but both times for me the lockup period was 6 months. The reason: the underwriters don’t want the insiders to immediately try to sell a whole lot of shares when the IPO occurs, as this will depress the stock price.
Another thing you have to worry about, however, are reverse splits. If the company’s directors believe the outstanding private company’s shares (before the IPO) are worth, say, $2.50, they may institute a “reverse split”. In this case, they may institute a 4 to 1 reverse split. Which means that, if you had 400 shares before the split (at about $2.50 / share), after the split you will have 100 shares (worth about $10.00 per share). They do this because the underwriters want the stock price at the IPO to be a minimum of about $10 - $15 per share. (An exchange can de-list a company whose shares are worth less than $5 a share.)
Both of the companies I worked for had reverse splits before the IPO. The bean counters will tell you that your value in the company is the same after the split as before. But this doesn’t take the psychological effects into account. If I have 1000 shares before the IPO, I’m assuming that the stock will open at $10 - $15, making my shares worth $10,000 - $15,000. But if they have a reverse split, your number of shares, and those share’s worth, plummets.
You appear to be confusing an underwriter mandated lockup period and share resale restrictions (exemptions from which are described under Rule 144).
I think you inadvertently gave bad information - unregistered shares very much are restricted shares, and you need an exemption (such as are described in Rule 144) in order to sell them. The shares are very much restricted, not just the individual.
Of course the analysis changes if the company doing the IPO also registers the existing outstanding shares.
You would have absolutely zero idea what their dividend policy will be based upon the simple fact that they are going public. A general rule of thumb though is that mature companies are more likely to pay dividends. Mature companies are not usually doing an IPO. Therefore, the best guess based upon zero information about the company would be that they will not pay dividends.