Letter: Those bonus shares

To the Editor
Although bonus shares “does not add to the market value of a company’s shares”, it could put increased dividends in the pockets of shareholders. Assuming that the following financial year the particular company made increased profits, the shareholders could receive £200,000 dividends in the form of 20 per cent on 1 million £1 shares, or 10 per cent on 2 million £1 shares.
It could happen (and no doubt does) that after a number of years shareholders could have returned to them in dividends the whole of their original invested capital, and yet at the same time still possess increased number of shares above their original number which have been handed out in bonus shares from time to time.
T. W. C., Welwyn Gdn. City, Herts.

REPLY
The article (August Socialist Standard) set out to show how erroneous is the belief that doubling or trebling a company’s shares, by an issue of bonus shares, doubles or trebles the market price of each shareholder’s holding. All that each shareholder gets from the change is double or treble the number of shares but with the market price of each share reduced to approximately a half or a third of what it was before, leaving the market price of the whole of the company’s shares unchanged. In his letter our correspondent concedes that this is correct.
He goes on, however, to claim that a bonus issue “could put increased dividends in the hands of the shareholders”, and he asks us to consider the position of the company referred to in the article if its profits increased so that it paid out a total dividend of £200,000 compared with the £100,000 of the year before. But of course this increase of dividend does not arise from or depend upon the issue of bonus shares. Our correspondent’s letter admits as much, for in his own example the shareholders get the £200,000 whether the bonus issue is made (10 per cent on 2 million shares) or whether no bonus issue is made (20 per cent on 1 million shares). All that it tells us is that if a company’s profits increase sufficiently it can pay out twice as much dividend, whether it makes a bonus issue or not.

The final paragraph is equally irrelevant to the question of bonus shares. It is quite true that if a company makes enough profit to pay out an annual dividend equal to 10 per cent of the original capital it will take only ten years for the shareholders to get back all their original investment and still hold their shareholding. But this result is achieved whether the company issues bonus shares or not, it all depends on making sufficient profit. If the company does not make enough profit an issue of bonus shares is not going to make any difference.

We repeat—the issue of bonus shares does not add to profits or dividends.
H.