Stock dividend and stock split are two aspects that are confused easily due to many similarities between them. Both result in an increase in the number of outstanding shares in the company without affecting the total market value. The key difference between stock dividend and stock split is that while stock dividend allocates a number of shares free of charge based on the prevailing share ownership, stock split is a method where existing shares are divided into multiple units with the intention of expanding the number of shares.
CONTENTS
1. Overview and Key Difference
2. What is Stock Dividend
3. What is Stock Split
4. Side by Side Comparison – Stock Dividend vs Stock Split
5. Summary
What is Stock Dividend?
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.
E.g. Company N decides to offer a stock dividend where shareholders receive an additional share for every 25 shares held. Thus, an investor holding 150 shares will get 6 new shares.
There are two types of Stock Dividend:
Small Stock Dividend
A stock dividend is considered to be small if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend.
Large Stock Dividend
If new shares issued exceeds 25% of the total number of shares outstanding prior to the stock dividend, this is classified as large stock dividend.
Figure 1: Stock Dividends
What is Stock Split
Stock Split is a method where the company divides the existing shares into multiple units. 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.
E.g. If the company currently has a total market value of $3billion (30 million shares trading at $100) and the company decides to implement a stock split based on 3 for 1 basis. Following the split, the number of shares will increase to 60 million. This results in a reduction of the share price to $50 per share. However, there is no overall change in the total market value of $3 billion
The main advantage of stock splits is its ability to facilitate improved liquidity of shares. Following a stock split, shares are more affordable to the investors due to the reduced share price. Stock splits are practised by many large scale companies such as Coca-Cola and Wal-Mart.
Figure 2: Wal-Mart conducted nine Stock Splits between the period between 1975-1999.
Normally, companies split stocks when the share price is on the rise. However, an overly confident split may lead to risks if the share price falls below a certain level in the future. A decision for a stock split may be taken by the board of directors or by the vote of shareholders; thus, this can be a time-consuming and costly exercise.
The opposite of stock split is referred to as a ‘Reverse Stock Split’ where the existing number of shares are been merged to reduce the number of outstanding shares.
What is the difference between Stock Dividend and Stock Split?
Stock Dividend vs Stock Split |
|
| Stock dividend apportions a number of shares free of charge based on the current share ownership. | Stock split divides the existing shares into multiple shares with the intention of expanding the number of shares. |
| Purpose | |
| Stock dividend is usually offered in situations where the company is unable to pay a cash dividend. | Stock splits are done to improve the liquidity of the shares. |
| Shareholders | |
| Stock dividends are only available to existing shareholders. | Both existing shareholders and potential investors can benefit since share prices are reduced. |
Summary – Stock Dividend vs Stock Split
Both stock dividend and stock split results in an increase in the total number of shares outstanding. The main difference between stock dividend and stock split mainly depends on the purpose they are issued for, as both result in similar outcomes. Stock dividends is a suitable option for short term cash limitations; however, this may not be liked by many investors since the majority expect regular incomes that only cash dividends can provide.
Reference:
1.”Stock Dividend.” Investopedia. N.p., 26 Nov. 2003. Web. 02 Mar. 2017.
2.”Stock Splits and Stock Dividends | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 02 Mar. 2017.
3.”The Coca-Cola Company Stock Split History.” The Coca-Cola Company Stock Split History: The Coca-Cola Company. N.p., n.d. Web. 02 Mar. 2017.
4.”Wal-Mart Stores Stock Split History.” Stock Split History. N.p., n.d. Web. 02 Mar. 2017.
Image Courtesy:
1. “Stocks dividend buy” By Kalkine – Own work (CC BY-SA 4.0) via Commons Wikimedia
2. “Walmart store exterior” by Walmart (CC BY 2.0) via Flickr