Does a Stock Dividend Dilute the Price Per Share as Would a Forward Stock Split?

He is the sole author of all the materials on AccountingCoach.com. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The corporation’s stock is currently selling at $90 per share. The actual practice seems to be mixed between these two approaches. The choice of one or the other has little impact on the description of the firm’s financial position provided in the balance sheet.

• With all other things remaining the same, the stock price will fall.
• Instead of going through the legal steps required for a split, the board of directors can simply declare a large stock dividend and distribute the shares to the stockholders.
• As a result, the outstanding number of shares increase; however, there will be no change in the total value of shares since the split does not result in cash consideration.
• Stock splits and stock dividends are also two of those topics in which we are often confused.

In contrast to cash dividends discussed earlier in this chapter, stock dividends involve the issuance of additional shares of stock to existing shareholders on a proportional basis. For example, a shareholder who owns 100 shares of stock will own 125 https://dodbuzz.com/running-law-firm-bookkeeping/ shares after a 25% stock dividend (essentially the same result as a 5 for 4 stock split). Importantly, all shareholders would have 25% more shares, so the percentage of the total outstanding stock owned by a specific shareholder is not increased.

Breaking Down Stock Splits

Every corporation has the same goal in mind—to maximize shareholder wealth. This goal is fulfilled in either of two ways, by reinvesting cash into the business to stimulate its growth or by paying dividends to shareholders. Tesla wants to split its stock so it can pay a stock dividend to shareholders, according to a filing Monday. The 8 slices of a typical pizza represent the shares of stock and the $2 cost per share is the par value of the stock. When I double cut the pizza, this represents a 2-1 stock split with 16 shares of stock (or slices of pizza) for the new par value of $1 per share. However, if this event is a stock dividend, the stock’s par or stated value will not change, but Retained Earnings will decrease and Common Stock will increase.

Assume that a board of directors feels it is useful if investors know they can buy 100 shares of the corporation’s stock for less than $5,000. In other words, they prefer to have the price of a share trading between $40 and $50 per share. If the market price of the stock rises to $80 per share, the board of directors can move the market price of the stock back into the range of $40 to $50 per share through a 2-for-1 stock split.

Contents

In both cases, the number of shares issued and outstanding doubles, and the market price per share will fall accordingly. It may seem odd that rules require different treatments for stock splits, small stock dividends, and large stock dividends. There are conceptual underpinnings for these differences, but it is primarily related to bookkeeping. The total par value needs to correspond to the number of shares outstanding.

For example, a stockholder who owns 1,000 shares in a corporation having 100,000 shares of stock outstanding, owns 1% of the outstanding shares. After a 10% stock dividend, the stockholder still owns 1% of the outstanding shares—1,100 of the 110,000 outstanding shares. Stock dividend is one of the two principal ways in which companies can grant dividends to shareholders, the other been cash dividends. Even though cash dividend is the most widely used method, companies can offer stock dividend in years that they make little profits or losses. This is an allocation of an additional number of shares based on the existing percentage of share ownership. Since there is no cash involvement, the total value of shares will remain the same following the stock dividend.

More from InvestorPlace

Each transaction rearranges existing equity, but does not change the amount of total equity. Companies sometimes increase the number of shares outstanding (and at the same time reduce the value of each share) by issuing stock dividends or stock splits. These events are usually non-taxable, but change the number of shares you own and the basis of those shares. Since a stock dividend distributable is not to be paid with assets, it is not a liability. Since every stockholder will receive additional shares, and since the corporation is no better off after the stock dividend, the value of each share should decrease. In other words, since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same.

Thus, it takes only $6,000 rather than $24,000 to purchase 100 shares. Therefore, a stock dividend and a stock split both dilute the stock’s price. As a result, when looking at a historical chart, one might expect to see the stock dropping from $50 to $25.

Dividend & Stock Split History

However, every stockholder’s number of shares has doubled—causing the value of each share to be worth approximately half of what it was before the split. If a corporation had 100,000 shares outstanding, a stockholder who owned 1,000 shares owned 1% of the corporation (1,000 ÷ 100,000). After a 2-for-1 stock split, the same stockholder still owns just 1% of the corporation (2,000 ÷ 200,000). Before the split, 1,000 shares at $80 each totaled $80,000; after the split, 2,000 shares at $40 each still totals $80,000. The current year’s EPS is calculated based on the number of common shares after any stock dividends and splits.