Does a Bonus Issue Guarantee Outperformance?

The announcement of bonus shares can have a beneficial impact on a company’s stock price and market sentiment in the short term. However, our study indicates that the long-term scenario may be totally different 

Recently the Gujarat government issued a new policy regarding the minimum amount of dividend distribution and bonus shares for its state public sector undertakings. In the wake of this development, most of the public listed companies from Gujarat saw their stock price jumping by more than 10 per cent and some even more than that. Out of the many triggers that retail investors look for before investing in a share it is the bonus announcement by companies. Many a times it is considered as a positive trigger for the companies. Year-till-date 35 companies have already announced their results and in the last calendar year 155 companies have announced a bonus issue.  
 

Understanding Bonus Issues 

Bonus issues, also known as bonus shares, are free additional shares offered to a company’s current owners. This issuance raises the total number of shares outstanding while maintaining existing shareholders’ proportional ownership. The announcement of bonus shares can have a beneficial impact on a company’s stock price and market sentiment in the short term. The notion of obtaining ‘free’ shares might attract new investors and potentially drive up the demand for the stock, resulting in a brief boost in the share price. Positive emotion can also assist a company in maintaining or improving its market reputation. 

Bonus share issuances are frequently used to raise liquidity, strengthen capital structure and increase shareholder value. Furthermore, bonus share issuances can reflect a company’s confidence in its future prospects and communicate to investors a message about long-term stability. However, the long-term impact of bonus shares on a company’s profitability is determined by how well the additional equity is utilised. It is critical for businesses to use the capital raised efficiently, such as investing in growth possibilities, research and development, acquisitions or debt reduction. 

If the corporation fails to allocate money properly, the issuance of bonus shares may not boost long-term success. It’s important to note that the impact of bonus share issuing on firm performance varies by industry and sector. Companies in high-growth or technology-driven businesses, for example, may be more willing to issue bonus shares to fund expansion and capitalise on market opportunities. Bonus share issuance, on the other hand, may be used by mature and stable corporations to reward existing shareholders without straining their cash flows.
 

Our Study
 

Data — To find out if there is any positive relation between bonus issue announced by the company and return offered by the shares, we did a study of data for more than five years. We took all the companies that have announced bonus between January 2018 and October 2022. We considered only those companies that are part of the current BSE 500 and have announced bonus issue in last five years ending October 2022. We found 191 companies that have announced bonus issue in this period. We furthered analysed the returns of these companies against the BSE 500 between one month, three months and six months from the announcement date and ex-bonus date. 

Result — We found that after one month of announcement of the bonus issue, returns of shares by these companies outperformed the BSE 500. On a median basis they outperformed the BSE 500 by 3.9 per cent. Even the number of companies outperforming BSE 500 was as high as 60 per cent. Nevertheless, when we extended the study for three months post the announcement of the bonus issue we found that the returns are not so lucrative and actually the shares of these companies underperformed. On a median basis they were found to have underperformed the BSE 500 by 15 per cent and only 32 per cent of the companies were able to beat the BSE 500 returns in the same period. We did the same exercise for six months too. See the table below to know the result summary.

Returns from the ex-bonus date are also not very encouraging and actually on a median basis these bonus share issuing companies have underperformed the BSE 500.

On average, stocks tend to have negative returns one month after announcing a bonus. Some companies' performance improves after the exbonus date, while others see improvement after announcing the bonus. Benchmark indices perform more stably but with minimal returns compared to companies offering bonuses. Some stocks that announce bonuses have shown substantial returns, while others have had negative returns. Market conditions, the company's financial health, and investor attitude determine whether a bonus issuance leads to outperformance. Positive investor sentiment may result in short-term stock price gains, but long-term performance depends on fundamentals, growth prospects, and market factors.
 

Conclusion

We do not see any relationship between bonus issue and any outperformance provided by them. If we leave one month post bonus announcement, on an average they have given negative returns. Some companies’ performance improves after the ex-bonus date whereas a greater number of companies’ performance improves after the company makes the bonus announcement. When compared to benchmark indices the performance of indices over that period is far minimal but very stable as compared to that of companies that offer bonus. The BSE 500 has provided more stable returns as compared to the stocks that announced bonuses, but are very minimal. 

Some stocks which announced the bonus have returned much more substantial return in some cases, while some stocks have given negative returns. For example, ELGI Equipments Limited, which announced bonus issue on August 11, 2020 with ex-bonus date on September 24, 2020, has witnessed a substantial outperformance. Meanwhile, Anuh Pharma Limited that announced its bonus issue during the same month has grossly underperformed the market. Whether or not a bonus issuance leads to outperformance is determined by a variety of factors, including market conditions, the company’s financial health and investor attitude. 

In some situations, a bonus issue may be seen positively by investors, resulting in greater demand and, potentially, a shortterm gain in stock price. However, this is not always guaranteed and a company’s stock’s long-term performance will be determined by its fundamentals, growth prospects and other market considerations. It should be noted that a bonus issue does not guarantee outperformance. Before making an investment decision, investors should analyse a company’s overall financial health, management quality, competitive positioning and industry trends. Instead of depending merely on the existence of a bonus issue, substantial study and analysis are required to make informed investing judgements.