Overlooked threat to investors

Corporate actions can significantly impact a company’s share price and, therefore, investment returns, yet investors often overlook them. 

This is according to PSG Wealth’s head of securities, Wendy Myers, who said investing involves not only choosing the right stocks but also understanding portfolio performance evaluation and the impact of corporate actions.

“When a publicly traded company announces a corporate action, the savvy investor knows it’s an event likely to impact the stock price,” she said.

“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.”

Simply put, a corporate action is an event initiated by a public company that affects its shareholders and the stock price. 

Myers explained that corporate actions can indicate a company’s financial health and prospects in the near term. They can be voluntary 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.

One of the most prominent corporate actions seen on the JSE this year was BHP’s proposed takeover of Anglo American, which saw the latter company’s share price skyrocket.

Myers explained that something as simple as dividend distributions can result in a cash injection into an investor’s portfolio, offering options to reinvest in the market or enhance cash reserves until they are ready to deploy them. 

Companies can also offer a dividend distribution in the form of stock instead of cash. This will naturally increase an investor’s exposure to market fluctuations, impacting a portfolio differently than cash dividends and their associated returns.

Stock splits are a far more complicated type of corporate action that is often seen in the technology space, particularly after these companies enjoy 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 a concomitant decrease in share prices. 

Myers explained that this makes these stocks more tradeable due to affordability for retail investors.

Another type of corporate action, spinoffs, occurs when listed companies divest part of their assets. 

This has also been a common corporate action on the JSE this year, with Transaction Capital unbundling WeBuyCars, RCL Foods spinning off Rainbow Chicken, and Pick n Pay listing Boxer separately.

After a spinoff, investors own the original share in their portfolio and the newly spun-off share. 

Myers said 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. 

She used Transactional Capital’s announcement to separately list its We Buy Cars division on the JSE to unlock value to shareholders as an example. 

This corporate action has positively impacted Transactional Capital’s share price, demonstrating the benefit this type of corporate action can have for investors.

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,” Myers explained.

She said 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. 

She cautioned investors to 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.

Myers added that all of these actions also have different tax implications for investors, who need to be aware of them.

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 an investor receives shares from the acquiring company in exchange for their shares in the target company, they might face capital gains tax. 

“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,” Myers said.