Special Dividends or Bonus Dividends

What are Special Dividends / Bonus Dividends?

Special Dividend (also known as Bonus Dividend) is a once-off, non-recurring cash distribution of the company’s after-tax profits to shareholders for the financial period. It is made either in addition to or at a rate higher than the company’s regular dividend distributions and hence is not indicative of a sustainable increase in the company’s future dividend payments nor constitute a shift in the company’s current dividend policy. For this reason, Special Dividend is excluded from yield and valuation calculations at ShareInvestor.

Companies distribute Special Dividends for various reasons, such as:

  • To return excess cash surplus to shareholders as a reward to engender shareholders’ loyalty
  • To achieve a more efficient capital structure by way of restructuring its equity- versus debt-based financing
  • To create a positive market signaling effect of the company’s sound footing and long-term prospects

Source: ShareInvestor.com

How do Special Dividends / Bonus Dividends work?

Source: ShareInvestor.com

The basis at which the stock is trading will be shown together with the stock’s trading data at www.ShareInvestor.com whenever the company declares any entitlement.

After the announcement on the Special Dividend, the shares will be trading on a “cum-dividend” basis as denoted by “CD” symbol as reflected beside the stock counter. As long as an investor owns the shares on the last day when it is trading on “CD” basis, the shareholder will be eligible to receive the Special Dividend entitlements as declared by the company. Once the shares trade on “ex-dividend” basis as denoted by “XD” symbol, an investor who purchases the shares will no longer be eligible to receive the Special or Bonus Dividend entitlements as declared by the company.

Source: ShareInvestor.com

The details of the dividend entitlement are made available under the Events Calendar section of the Factsheet at www.ShareInvestor.com.

Declaration Date (Also known as the Announcement Date)

The date on which the board of directors declares or announces that a Special or Bonus Dividend will be paid.

Last Cum Date [Tth Trading Day]

The last trading day preceding the Ex-Date whereby the stock counter is trading with the declared Special or Bonus Dividend entitlement attached to it.

Ex-Date

The date starting which the stock counter trades ex-dividend, that is, without the previously declared Special or Bonus Dividend entitlements attached to it.

Record Date (Also known as the Books Closure Date) [T+3th Trading Day]

The date as at the close of the business on which the securities accounts of shareholders must be credited with the company’s shares in order to be entitled to receive the Special or Bonus Dividend declared by the company.

Payment Date

The date on which the company pays the shareholders the Special or Bonus Dividend.

Example 

CEI announced an S$0.0016 Special Dividend per ordinary share with Ex-Date: 19/04/2012 and Books Closure Date: 23/04/2012.

Assuming Mr. X, Mr. Y and Mr. Z are the only shareholders of the company, each of them owns 100,000,000 shares in CEI with each share trading at S$0.120 on the stock exchange on cum-dividend (“CD”) basis. The market value of each of Mr. X’s, Mr. Y’s and Mr. Z’s shareholdings amounts to S$12,000,000 and the company’s market capitalisation (Total Number of Issued Shares x Share Price) adds up to S$36,000,000 before the stock trades on ex-dividend basis.

For every CEI share Mr. X, Mr. Y and Mr. Z purchased before the Ex-Date and own till the Books Closure Date, each of them will be entitled to S$0.0016 Special Dividend per ordinary share. In total, the company will be paying a total of S$480,000 on the Payment Date in cash to the 3 shareholders.

On the Ex-Date, the market will typically adjust the share price downward by the amount of the Special Dividend payout to take into account that buyers of the stock on or after the Ex-Date no longer have a claim to the Special Dividend entitlement declared by the company. The amount set aside to be paid out in Special Dividends represent cash outflows from the company, resulting in a reduction in the company’s market capitalisation.

Market Value of Company where shares trade on cum dividend basis:              S$36,000,000
LESS Special Dividend payout in cash:                                                                   S$480,000
Market Value of Company where shares trade on ex-dividend basis:                 S$35,520,000
Market Value per Share trading on ex-dividend basis (S$35,520,000/300,000,000 shares): S$0.1184

Alternatively, the Market Value per Share trading on ex-dividend basis, also known as the Theoretical Ex-Dividend Price can be derived as follows:

Theoretical Ex-Dividend Price
(A theoretical price which does not take into account other corporate or market factors) 

= (Closing Price Per Share* – Special Dividend Per Share) x Closing Price Per Share*
                Closing Price Per Share on Last Cum Date           

= (S$0.120 – S$0.0016) x S$0.120
               S$0.120 

= S$0.118 per Share on Ex-Date

* Refers to Closing Price Per Share on Last Cum Date.

Mr. X’s, Mr. Y’s and Mr. Z’s shares trading on ex-dividend basis are therefore worth S$0.118 per share instead of S$0.120 per share trading on cum dividend basis.

Effects of Special Dividend on Historical Price Data

As explained above, corporate actions such as Special Dividends have an effect on the price of the share when it trades on ex-dividend basis following the conclusion of the corporate action. Hence, price adjustment on historical data prior to the Ex-Date will be applied at the close of market trading on the Last Cum Date. The purpose of the historical price adjustment is to allow for comparison between prices before the Ex-Date and after the Cum Dates.