From time to time, announcements appear in the Press saying that a company is to make a free issue of shares, a bonus or scrip issue. This means that existing shareholders will receive an additional number of shares without having to make any payment for them (it differs from a “rights” issue when shareholders receive the right to buy shares at a price below the market price).
Scrip issues are made when a company has accumulated large reserves and decides to “capitalise” them. The result in the balance sheet is that the reserves are reduced and the capital correspondingly increased. If the company decided to issue one £1 share for each existing £1 share, each shareholder would have his holding doubled. If he held 100 £1 before the issue he would hold 200 £1 shares afterwards. It does not mean that the shareholder receives a cash payment.
On the face of it this would seem to be very pleasing for the shareholder: he appears to be twice as well off as he was before. And some observers imagine that it is so. For example, in 1959 when the Westminster Bank capitalised £3½ million from reserves and issued 3,500,000 new £1 shares the Daily Worker (16/7/59) reported it under the heading “£3½ Million Gift to Bank’s shareholders,” and the Daily Herald (24/5/55) had the following comment on British Petroleum’s issue of four new shares for each share held
Did you happen to buy a few hundred shares in the British Petroleum Company last year? No? Bad luck. It would have been well worth it—worth it four times over, in fact. In November the company handed out £80 million from its reserves in the form of a 400 per cent share bonus—that is four new shares of £1 for every share held. Easy to make a tax-free fortune here—if you have the money to start.
It sounds too good to be true. It also presents a problem for the Marxist, who knows that profit, rent and interest come out of the unpaid labour of the workers and cannot suppose that between one day and the next, by means of a piece of manipulation in a balance-sheet, surplus value has become five times as great.
There is, of course, a catch in it, because the stock-exchange price of each share immediately falls in approximately the same proportion as the number of shares increases. Recently the Limmer and Trinidad Lake Asphalt Co., Ltd., made an issue of shares (and also an adjustment of the nominal value of each share), with the result that the shareholder who on 22nd June, 1961, held one hundred 10s shares with a stock-exchange price of 60s. each, found himself a few days later with three hundred 5s. shares with a stock-exchange price of 20s. each. The total price at which he could have sold the one hundred shares was £300, exactly the same as the price at which he could afterwards sell the three hundred shares.
The British Petroleum shareholder, referred to above, saw his shares fall from a stock-exchange price of £18 2s. 6d. each on 16th December, 1954, to £3 14s, 4½d. on 21st December. So the Daily Worker’s statement on 4th November, 1954, that the “oil kings get £80 million,” implying that the shareholders had suddenly become richer by that amount, was pure phantasy.
The real explanation is that, apart from the fluctuations of stock-exchange prices due to other causes, including general waves of buying and selling and varying estimates of the future profits of the company in question, stock-exchange prices are determined by the amount of profit the company has been earning and the amount they have been retaining for paying out as dividends. If profits are high and go on rising a share of nominal value £1 may be selling at say £3, and no capitalising of reserves will make any appreciable difference to the stock-exchange valuation of the total of the company’s shares.
The late Sir Oscar Hobson was quite correct when he wrote in the News Chronicle (1/2/51):
Shareholders who vote to capitalise reserves of their companies and convert them into new shares for distribution among them in proportion to their existing holdings give themselves nothing which they do not already possess. . . . The issuing of bonus shares does not and cannot add to the value of a company’s assets or to its earning power. It does not add to the market value of a company’s shares.
A recent issue of the Daily Worker (17/6/61) repeats its old delusion, though so qualified that it really gives away the main case: having roundly declared that it is “nonsense” to say that doubling the number of shares would be accompanied by halving the stock-exchange price of each share, it lamely concludes:
The total shares owned by the firm’s shareholders after a bonus issue are almost always worth more—and often considerably more—than they were before it.
This qualified statement is indeed partly true. The B.P. shareholder who at first had one share quoted at £18 2s. 6d. later had five shares quoted at a total for the five of £18 11s. 10½d., a gain of 9s 4½d. The reason why there is sometimes a small total gain is that a bonus issue is usually read as a sign that the directors are optimistic about future prospects.
It may then be asked why do directors go to the trouble and expense of making such an issue? One reason is that directors do not want to make their dividends look very large because, or so they believe, this encourages workers to press harder for higher wages. The directors think that paying out dividends of £100,000 in the form of 20 per cent. on 500,000 £1 shares does not look so tempting as paying out £100,000 in the form of 10 per cent. on 1,000,000 £1 shares. An additional reason for bonus share issues is that some companies see advantage in raising their issued capital up to the £1,000,000 required by law to qualify their shares to be held by those responsible for the investment of Trust Funds.