The announcement came to its shareholders through text and email.
It said that Kenya Re would have its 21st annual general meeting on Friday, June 14, 2019 at 11am. Venue – the auditorium of Bomas of Kenya.
Several who received that text promptly deleted it, as if it were a bother. Others read it on email then marked it back as unread; these ones were non-committal.
Others blissfully ignored it; a handful diarised it in their calendars. (Everyone who received the invite would have confirmed attendance if they knew they would be given free gym bags and a gift voucher at the auditorium door. You know how Kenyans are with free things.)
It was a run-of-the-mill AGM. Lengthy speeches with big words about ‘strategic objectives’ and ‘five-year plan’ were made, bad jokes were cracked, new directors were appointed, the zeitgeist of the next era.
Silver Springs band played zilozopendwa (those that were loved) until those toeing the dance floor hyperventilated and peeled off their jackets.
The shareholders voted on two proposals: they voted on a cash dividend of Sh0.45 and a stock dividend of three for one, 3:1.
A bonus share issue – every shareholder would get three free shares for every share he already held. The company was telling its shareholders thanks and thanks.
What is smart about this cheap move is the tax saving – cash dividends suffer withholding tax, stock dividends do not.
That was Friday. As these things go, the shareholders probably stayed on and had roast nyama and drinks in excess while dancing the night away to Burna Boy. The city went to sleep.
On Monday, when the city awoke and trading opened at the Nairobi Securities Exchange (NSE), the Kenya Re counter was trading on a new trajectory.
It had more shares to trade but they traded at a lower revalued price, courtesy of the bonus issue: the counter that Friday closed at Sh14.75 opened on Monday at Sh4.24.
Last Friday – on November 15, 2019 – it closed at Sh3.12. One share in June is now worth four shares at Sh12.48.
Such information is crucial when investing in the stock market. Rookie investors mistakenly invest in a company solely on its price.
Share price, however, is an isolated indicator of performance. Back-stories such as the above explain why a company’s shares would lose more than half their value over a weekend.
Rookies must also differentiate bonus issues from stock splits. In a stock split, the company divides existing outstanding shares into multiple smaller shares. It increases its outstanding shares.
Imagine I am the company and I have Sh100 note in my hand. A stock split would split that Sh100 note into five Sh20 coins.
Having five coins translates to a potential of reaching five small investors who can afford that Sh20 coin.
Fourteen companies in the NSE split their stock between 2004 and 2016. KenolKobil did a 10:1 split in July 2004. Its shares traded at Sh478 before the split. The counter closed on November 15, 2019 at Sh22.
There can also be a reverse stock split, where a company decreases the number of outstanding shares – it flushes current shares down the toilet and issues new fewer shares based on a reverse split ratio.
The new shares increase in value, or at least they should. Reverse stock splits are not common in the NSE.
Kenya Airways did a reverse split in November 2017. (KQ is the readiest example but not the best one because their split came with a conversion of debt to equity.)
It was a 1:4 split, investors got one share for every four held. The shares traded at Sh12.50 before the split. On November 15, 2019, the counter closed at Sh2.96.
I argued with stock market pundits about whether Kenya Re issued bonus shares or did a stock split.
Well, Kenya Re issued bonus shares – it capitalised Sh5 billion of its retained earnings for the bonus, share price responded as though there was a split.
Kenya Re is the second company to issue bonus shares in 2019. I&M Holdings did a 1:1 issue in March. Their counter opened the year at Sh85. It closed on November 15, 2019 at Sh49.05.
(Shout out to Scribes at Waiyaki Way, Tino and Mukibi for exchanging research notes with me. Thank you, gentlemen. I will look for you chaps this December for that cold Tusker.)
Bett Kinyatti is a certified accountant with ACCA and a former financial auditor
