How corporate actions impact your portfolio
26 Jun, 2024

 

Wendy Myers, Head of Securities at PSG Wealth

 

Investing involves not only choosing the right stocks to ensure that you achieve your long-term investment goals but also understanding portfolio performance evaluation and the impact of corporate actions on portfolio performance.

 

When a publicly traded company announces a corporate action, the savvy investor knows it’s an event likely to impact the stock price. If you’re a shareholder or considering buying shares of a company, you need to understand how a corporate action will affect the company’s share price.
Corporate actions can indicate a company’s financial health and its prospects in the near term. They can be either voluntary in nature, when investors choose to participate, or mandatory, when participation is obligatory.

 

Examples of corporate actions include dividend distributions, stock splits, spinoffs and mergers and acquisitions.

 

Dividend distributions can result in a cash injection into an investor’s portfolio, offering options to reinvest into the market or enhancing your cash reserves until you are ready to deploy it. Companies can also offer a dividend distribution in the form of stock instead of cash. This will naturally increase your exposure to market fluctuations, impacting your portfolio differently than cash dividends and their associated returns.

 

Stock splits is a type of corporate action that we have seen in the technology space, often subsequent to those companies enjoying tremendous runs in their share price performance. Google, Amazon and more recently Nvidia are examples where these companies split their shares, resulting in an increase in shares in issue with concomitant decrease in share prices. This makes these stocks more tradeable due to affordability for retail investors.

 

Spin offs occur when listed companies divest part of their assets. Post spinoff, investors own the original share in their portfolio plus the newly-spun off share. The decision to undertake a spinoff, could suggest the company is preparing for new growth ventures, centring its efforts on its core business or attempting to unlock value. A recent example of the latter was Transactional Capital’s announcement to separately list We Buy Cars division on the JSE to unlock value to shareholders. Thus far, this corporate action has had a positive impact on the share price of Transactional Capital, demonstrating the benefit to investors this type of corporate action can have.

 

Mergers and acquisitions are also examples of corporate actions that could have a material impact on a company’s share price. A merger occurs when two or more companies combine, and all parties involved have agreed to the terms. In this case, one company formally surrenders its stock to the other. Shareholders may interpret a merger in two ways: either as a strategic move for business expansion or as an indication that the industry is consolidating, compelling the company to absorb competitors to maintain growth. Investors should carefully consider their positions upon the announcement of a merger or acquisition and whether the share still meets their investment requirements when considering their portfolio as a whole.

 

All of these events discussed have different tax implications for individual investors. For example, cash dividends are usually considered taxable income in the year they are received. In South Africa, investors are charged dividend withholding tax on cash and stock dividends received.

 

In the case of a merger, if you receive shares from the acquiring company in exchange for your shares in the target company, you might face capital gains tax. It is important to consult tax professionals to understand the specific tax consequences of corporate actions when they occur.

 

Corporate actions can significantly impact a company’s prospects and share price, so investors should seek guidance from a financial adviser on how to interpret a corporate action in the context of the strategic focus of the company, and what it will mean for their portfolio returns going forward. An adviser can also guide you where there is an elective corporate action and when you are unsure whether the best option for your portfolio is cash or shares.

 

Last but not least, it is important to also consult a tax professional on the implications of certain corporate transactions, as these could be material.

 

ENDS

 

Author

@Wendy Myers, PSG Wealth
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