Correcting several things in this thread (chronologically):
It is not cheaper to issue debt than stock. Many stocks do not pay dividends, and the appreciation in shares is not cash out of the company’s pocket. With debt, the company has to pay out cash, while in issuing shares it does not. (The expenses involved in issuing shares are higher, however.)
While an already public company is called a “seasoned issuer,” I have not heard the term “seasoned offering.” Perhaps you are thinking of the term “secondary offering.”
One of the main reasons for reverse splits is the exchange listing standards. Share values of less than a set amount can get you delisted.
Typically, a private company would not authorize or issue millions of shares because in many states the franchise tax bills are based on shares authorized/issued and will be exorbitant. It is simple and typical to amend the corporate charter to increase the number of authorized shares to the millions just before the IPO.
Stock splits are not a clever way to pay a tax free dividend. The value of the company stays exactly the same–the value per share only changes. If a shareholder thinks the extra shares have made him richer on a tax-free basis, he is just naive.
As DrMatrix points out, splits can be in any proportion. Stock dividends also have generally the same effect and can be in any number at all.
You increase the number of authorized shares by amending the Articles of Incorporation. This requires Board and shareholder action and the exceptance of the amendment by the office of the Secretary of State of the company’s state of incorporation. The SEC requires full disclosure of charter provisions but does not judge their merits. Each exchange has listing standards which listed companies must comply with, but generally they do not care how many authorized shares there are.
1.) Debt, in almost every single case, is clearly cheaper!!! Else, why would an investor ever buy stock if they could get a higher return from debt with less risk??? What are you talking about??? How do you think the stock price appreciates anyway? It’s based on required return and the efficient market frontier eliminates companies that can’t hit it. And, if it looks like they can’t generate that return, then no one would buy the stock in the first place, since it’s riskier and the debtholders are paid first.
Or sneakily sophisticated. For that matter, a cash dividend doesn’t make you any richer either. It works like this. Company A has once class of stock trading at $20.00/share. They want to declare a $1.00/share dividend. Now, if they just declare the dividend and distribute the cash, the day after the record date for the dividend, the stock will be trading at about $19.00/share. The stockholders will have $1.00 in cash for each share they own but they’ll have to pay tax on it.
Suppose that, instead of distributing the cash, the company issues a 5% “stock dividend.” (The mechanics of this is that the company is actuall doing a 21 for 20 split.) This is generally a non-taxable event. The day after the record date, the stock will once again be trading at about $19.00/share but you will now own 105 shares of company A for every 100 you held before.
This is not, of course, identical to getting a cash dividend. You could also argue that Company A could simply retain the cash and do nothing. On the other hand, you could make a similar argument with respect to cash dividends, too.
I assume he means the signalling effect. Look, if the company has a new chunk of $x that they could use for a dividend payment or to reinvest in the company then either a dividend will be paid or the stock price will appreciate. Except for taxes, the investor wouldn’t care how they received it.
It’s not “do i pay a dividend or the money disappears,” of course.
Truthseeker will have to expand on it more so that i don’t end up writing a book on what i am assuming he means.
I was just trying to use round numbers for a general audience. That’s why I said “about” $19.00/share.
When a stock goes ex-dividend, the opening price per share is reduced by the amount of the dividend on the next trading day. After that, the market does what it does. A cash dividend is, of course, only one of many factors in a stock’s price.
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Well, what’s the benefit of taking a cash dividend? If it pays out $1.00/share, at the opening bell on the next trading day, you have 100 shares at $19.00/share and $100 in cash that is now taxable as income. Your total package is still worth just $2000.
In fact, in the margin, cash dividends can actually artificially depress (slightly) the price of a stock just before the ex-dividend date. All else being equal, people may not want to “capture” the dividend by buying the stock just before the ex-date since it will effectively turn part of their capital investment into a dividend taxable as income. By the same token, some long-term holders may wish to sell out just before the ex-date, thereby having the proceeds of the sale, including what would have been paid as a dividend, treated as long-term capital gains.
I think, however, that this is a bit more than eris wanted to know.
I apologize for the snappish tone of my post. I knew I soon as I hit submit that I should have said “points to consider” instead of “corrections.”
Yes, equity investors demand an expected return greater than that demanded by debt investors. Nonetheless, it is poor companies that must issue shares instead of debt because debt is too expensive for them in a cash flow/cash out-of-pocket sense. Rich “seasoned” (heh) companies, with the luxury of being able to select what types of instruments they will issue, can issue debt or equity and, after taking a bunch of factors into account, often choose to issue equity; poor companies never have the luxury of being able to issue debt becasue they can’t afford the interest payments–they don’t have the cash, so they must give up equity (they also often use equity to “pay” employees when they can’t afford cash). Stock is cheaper in this sense.
As I mentioned, saying “corrections” was a poor choice. I am sure there are many terms used in various financial newsletters I’m not familiar with. In my 16 years as a securities lawyer I had never heard of this one. The concept of a “seasoned issuer” comes from the registration requirements under the Securities Act of 1933. Issuers that have gone public and have faithfully filed their 10Qs, 10Ks, etc. under the 1934 Act for a set period of time and meet certain minimum financial and other requirements get to use an abbreviated format in registering offerings (Form S-3). Companies that meet these requirements are “seasoned issuers” in industry parlance because they have a track record of reporting and some amount of stability. I think it is a little odd that a term like “seasoned offering” has arisen since the offering itself is of new shares and has not been time-tested–the offering itself is a new thing. Nonetheless, I can see that offerings on Form S-3 might get this label; it is unclear, however, whether the newsletters limit “seasoned offerings” to S-3 offerings or whether they apply it to all follow-on public offerings, even those by “unseasoned” issuers.
** TruthSeeker**–the only quibble I have is this: a stock dividend is tax-free, but if you continue to hold both the original and the dividended shares, you remain exactly in the same position as if the company had done nothing (except the compnay has incurred a bunch of transaction expenses, often to create an “illusion” of success for its shareholders). If you get a share dividend and turn around and sell the extra shares (the ones you didn’t have before but which don’t represent any increase in the total value of your holdings), then you have a tax event (you may, and I don’t know this for sure, be able to convert the ordinary income you would get from a cash dividend to capital gains income by selling earlier owned shares, but you still pay tax). Again, the person who doesn’t sell gains nothing. With cash dividends, as you note, the opportunities for tax planning are there too.
I love lively financial discussions. As you’re a securities lawyer, maybe i can ask you about something that’s been bugging me. Consider two scenarios:
A wealthy investor forms a portfolio made up in the exact proportions as, say, the Fidelity Magellan fund.
An investor directly invests in the same fund.
Let’s say that transaction expenses are equivalent in each case based on some good deal or something. Okay, the two investors should each end up the same, BUT the second investor has de facto ceded his voting rights to the fund manager. There should be some value to these voting rights, especially in aggregation as the fund would experience with so many investors. The only thing I have seen to answer this is that since every investor will try to maximize wealth, it really doesn’t matter if you vote or not; you get the same benefits whether you vote or not. This seems a little shaky. Just wondering if you had encountered any logic behind this. Thanks.