Returning Unneeded Capital to Stockholders

These 2 examples illustrated
http://myinvestingnotes.blogspot.com/2009/08/examples-of-companies-with-large.html

• how the problem of excessive capital tends to develop,
• what its unfavourable effects are for the stockholders,
• how difficult it is to persuade management to correct the situation, and
• how the stockholders benefit if and when it is finally corrected.
  

Evidently several things are needed in order that stockholders and managements both may come to view situations of this kind in a sensible and business-like fashion.

• First, the principle must be accepted that, WHEN THE RESULTS ON CAPITAL ARE UNSATISFACTORY, it is appropriate for stockholders to inquire whether too much of their capital is employed in the enterprise.
• Second, if the amount at risk appears prima facie to be more than the business requires, the stockholders should insist on factual and convincing reasons for its retention. They should not be satisfied with the usual generalizations about what is "good for the business," and the usual vague references to possible future opportunities or disasters. (Managements consider either as a sufficient excuse for holding on to what is there.)
• Third, if capital can be spared, they should insist that it be returned to stockholders on an equitable basis.

Ref: Security Analysis by Graham and Dodd

Examples of Companies with Large Working Capital

Northern Pipe Line Company



In 1926, this company had:



Total Equity: capital and surplus of $4,235,000,

represented by

Current Asset: $3,489,000 of cash assets, $33,000 of other current assets, and

Fixed Asset: $1,319,000 of net plant,

less

Total liabilities: $606,000.



Total business done was only about $500,000.



A good part of the net earnings of $375,000 ( $9.375 per share) came from investments in railroad bonds.



The stock sold for an average value of $2,880,000 ($72 per share for 40,000 shares), which was considerably less than the cash assets alone.



These cash assets had been accumulated mainly out of annual charges for depreciation.



Dividends had been generous in relation to earnings and amounted to $6 per share in 1926.



The business, formerly very prosperous, had lost a good part of the volume and, with it, its appeal to investors.



Clearly, the outside stock-holders were at a great disadvantage in having so much of their capital tied up in cash funds that were held by an unattractive enterprise.



The management claimed that it was necessary or advisable to retain this money, because some day they MIGHT want to build a new pipe line.



It required a strenuous proxy contest to change the management's thinking.



Later, cash distributions of $70 per share ($2,800,000) were made as a return of capital, and the stockholders' over-all position was greatly improved.



----



Colt's Manufacturing Company.



This company emerged from the war with over $10 million in working capital, largely cash; but in 1946 its sales were only $5.0 million, and in 1946-1948 it lost money in the aggregate.



In this instance, the management embarked on two unrelated lines of business, in order to find additional employment for the large plant facilities and current assets. (However, the funds committed were held down to modest figures.)



The new lines did not prove successful, at least as far as enabling the company to show an adequate return on the owner's capital.



The stock sold persistently for much less than the working capital alone. (In 1947 the average price was 31, against net current assets or working capital of over $50 per share.)



Large stockholding interests, having previously obtained places on the board and having studied the company's problems and possibilities with care, finally decided that the capital should be reduced substantially by repurchasing a large proportion of the outstanding stock.



In 1950, following a call for tenders of stock, 125,000 shares, or 64% of the total, were bought in at a price as high as the working-capital value of $53.



The remaining shares had the same prorata interest as before in the current assets, and a much larger interest in the plant. This move was unquestionably beneficial both to the stockholders who sold back and to those who retained their stock, which sold as high as 65 soon after the repurchase.

Ref: Security Analysis by Graham and Dodd

The Paradox of Large Working Capital in Mediocre Companies

1. A prosperous company would appear more likely to accumulate excessive capital than a nonprosperous one.

2. Strangely enough, this is not true. Most prosperous companies, in our dynamic economy, have been able to expand their business more or less steadily, and this expansion has supplied a satisfactory outlet for the retained earnings.

3. On the other hand, many concerns that have shown mediocre results over a long period of years will in one way or another end up by holding too much of their stockholders' capital.

• This is often the result of a persistently low dividend, together with some fairly large accumulation of profits in boom periods.
• Sometimes new capital is raised by stock sales which later turn out to be redundant.
• In frequent cases the accrual of substantial annual depreciation and depletion charges results in gradually transferring the fixed assets into cash, with a consequent excess of working capitals.

4. Consequently, the question whether too much capital is being used in the business becomes of practical moment to stockholders only in the case of nonprosperous companies. (After all, properous companies do not present problems to their stockholderss except in the matter of dividend policy.)

• It is an area in which the interests of stockholders and managements are likely to clash vigorously.
• The more dubious the company's prospects - which means generally the less satisfactory its past results - the more anxious management is to retain all the cash it can in the business;
• but the stockholders would be well advised to take out all the capital that can be safely spared, because these funds are much more valuable to them if in their own pockets, or invested elsewhere, than if left in a nonprosperous business.

Ref: Security Analysis by Graham and Dodd

Stockholders should know whether their company is a prosperous and successful one.

1. Stockholders should know whether their company is a prosperous and successful one. The standard test here is average earnings on invested capital.
2. If the company is prosperous, the stockholders should insist on a dividend policy which will give them an adequate return on the intrinsic value of their investment.
3. If the company is not a prosperous one, the stockholders should insist on knowing why.

• They should try to find out whether the management is competent; if it is not, they should insist on changing it.
• If the earnings, the dividend returns, and the average market price of their shares are unsatisfactory in relation to the minimum value of the enterprise, they should constantly raise the question as to what changes should be made in policies, in corporate setup, or in the enterprise as a whole, in order to improve the position of the owners of the business.

Investment of Surplus Funds by Nonfinancial Businesses

The ordinary manufacturing or distributing business does not or should not have funds for permanent investment in securities.

For "temporary investment" - which may cover quite a number of years - the most suitable media are U.S. Government securities or tax-free issues.

It seems fairly evident, on the whole, that other types of investments by business enterprises - whether in bonds or in stocks - can offer a appreciably higher return only at risk of loss and of criticism.

A possible exception may be made in favour of well-protected preferred stocks or guaranteed common stocks, because of their attractive tax status when owned by a corporation.

Ref: Security Analysis by Graham and Dodd

Pound and gilt yields slide as Bank of England pledges to buy £50bn more

Pound and gilt yields slide as Bank of England pledges to buy £50bn more

Money and currency markets were sent reeling after the Bank of England surprised the City by unexpectedly extending its programme of Quantitative Easing (QE) by £50bn.


By Edmund Conway, Economics Editor
Published: 5:54AM BST 07 Aug 2009

Far from bringing its programme of bond-buying to an end, the Bank's Monetary Policy Committee has extended it beyond the initial £150bn ceiling agreed with the Chancellor.

The Bank said it planned to increase the scale of its programme to £175bn over the next three months, buying up a further chunk of the UK sovereign debt market. As expected, it also left the Bank rate on hold at 0.5pc. The move sent the pound more than a cent and a half lower against the dollar to $1.6801, although sterling strengthened against the euro, whose guardian, the European Central Bank, also left its key rate on hold at 1pc.

Related Articles

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ECB holds interest rate as downturn slows
*
Expert reaction to Bank's move
*
BoE cautious about recovery as it prints £50bn more

The announcement caused a further flurry in gilt market, where yields dropped at one point by more than 20 basis points, before settling at just above 3.7pc.

So much of the gilts market does the Bank now own that, in a landmark move, it also agreed that it would temporarily lend out gilts through the Debt Management Office to ensure that banks are able to close out positions as necessary.

The Bank has also suspended its purchases of four particular maturities of gilts after it emerged that it had bought as much as 70pc of their total issue. In a further sign of the rate at which it is exhausting the gilt market, the Bank will also start buying gilts of both shorter and longer maturities than the 5 to 25 year set it was originally buying.

Danny Gabay of Fathom Consulting said the news "reflects the fact that the Bank has to all intents and purposes 'cornered' the market for certain Gilts or bonds, to which market participants may still need to have access. Innocent enough - but it makes the charge that the whole [scheme] is an elaborate smokescreen for monetising the government's ballooning deficit even harder to refute.

"So, while we welcome the news of an extension to the asset programme, we would once again urge the MPC to consider a much wider range of assets to purchase than government bonds."

Yesterday's decision means that the Bank will soon own almost half of the entire gilts market, currently worth around £400bn, raising further questions about the Government's reliance on the QE programme to keep its financing under control.

Former Bank policymaker Sushil Wadhwani said he suspected the Bank's enthusiasm for QE could store up problems next year as attention focuses on the creditworthiness of various countries around the world.

"It seems to me that with the economic indicators bouncing they didn't need to take the risk [of extending QE], though I don't think it will do a lot of harm at this stage."

http://www.telegraph.co.uk/finance/financetopics/recession/5984999/Pound-and-gilt-yields-slide-as-Bank-of-England-pledges-to-buy-50bn-more.html

Business at NOL still 'depressed'

Business at NOL still 'depressed'
CEO says difficult dynamics to 'be with us for some time'

05:55 AM Aug 07, 2009

FEWER goods being shipped due to the global trade slowdown and cheaper shipping rates have caused net profits of Neptune Orient Lines (NOL) to slump for the third straight quarter.

The Mainboard-listed container shipping firm reported a second quarter net loss of US$146.2 million ($210 million), reversing a net profit of US$75.8 million in the same period a year ago.

While the second quarter losses was an improvement to the first quarter loss of US$245 million, the company expects business conditions to remain tough going forward and will likely post a "significant" full-year loss.

NOL's chief executive Ron Widdows said that "although volumes and operating performance improved in latter months of the first half, business conditions remained depressed, and this continued to impact our financial performance".

He added: "It's going to continue to be very difficult, so we've provided guidance that we anticipate a significant loss. These conditions that we see in place today, the dynamics affecting the industry, will be with us for some time."

The lower second quarter net profits was on the back of a 38-per-cent decline in group revenue for the three months ended June to US$1.4 billion. This was largely due to falling revenue from its container shipping division APL, which dropped 39 per cent to US$1.2 billion from the previous year due to declining cargo volumes.

The container shipping business accounts for about 80 per cent of NOL's revenue.

APL president Eng Aik Meng said: "In terms of volume, there has been an across-the-board reduction of 19 per cent. Most significant was the reduction in the Americas. Trans-Pacific trade had a 25-per-cent reduction in volumes in Q2 '09 versus Q2 '08." Europe had a similar reduction of 26 per cent and Asia/Middle East had a relatively smaller reduction of 8 per cent, he added.

For the rest of the year, the shipping firm said that it will continue to focus on improving asset utilisation, yields and productivity.

With the completion of its rights issue last month which raised nearly $1 billion, the company said that this will help it to better weather the downturn with a stronger balance sheet. 938LIVE

Challenges for the Value Investor

A value investor:

1. Has developed his method to analyze stocks.

2. Has established general principles for his stock selection and for protection of his portfolio (portfolio management).

3. Has the ability to distinguish between his investment and his speculation.

4. Has always emphasized safety of his principal in his investing.

5. Has the humility to know that an important but difficult topic is his determination of the future prospects of an enterprise.

6. Has the enthusiasm to look for bargains using his technique of value investing, often placing this technique beyond its relative importance in this entire field of investing.

7. Has adopted a critical approach to his investing being concerned with concepts, methods, standards, principles, and, above all, with logical reasoning.

8. Has a good understanding of the theory for the values that are applicable in his practice.

9. Has avoided prescribing standards which are too difficult for him to follow, or technical methods which are more trouble to him than they are worth.

10. Has the ability to blend his divergent experiences of the recent and the remoter past to help and guide him in navigating the uncertain future.

11. Has always approach his investing "from the viewpoint of calamity."

12. Has guarded himself against overemphasis upon the superficial and the temporary.

Glovemakers shares up on rising demand

Glovemakers shares up on rising demand
Published: 2009/08/07


OSK Research has an 'overweight' rating on the sector, raising its target prices on some rubber glove stocks


SHARES of rubber glove companies are on a roll right now and will continue to move up, riding on the global outbreak of influenza A (H1N1).

OSK Research Sdn Bhd has an "overweight" rating on the sector, raising its target prices on some rubber glove stocks, in line with recent developments in the industry's spurring demand for rubber gloves.

The local research house organised plant tours to four rubber glove companies last month, namely Top Glove Corp Bhd (7113), Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

"For Top Glove, we recommend a buy with a target price of RM8.50 from RM7.40 previously and Supermax, also a buy with a target price of RM3.85 from RM2.69 previously," it said in a report yesterday.

"We are also recommending a buy on Kossan, with a target price of RM4.98 from RM4.48 previously as well as on Adventa, with a target price of RM1.87 from RM1.31 before," it added.

While it has revised its target price upwards to RM5.45 from RM4.10 for Hartalega, the research house has downgraded its call to "neutral" from "buy" previously, given that Hartalega's share price has caught up with the valuation.

OSK Research said demand for rubber gloves from the medical industry remains strong, especially from developing countries.

"But glove supply is still short. Since the H1N1 outbreak has been raised to a pandemic level, the governments of developed countries like the US and Europe have urged all healthcare multinational corps to stock up on rubber gloves, which has created short-term demand.

"Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves," it said.

Also, with the US tightening its Food and Drug Administration regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market.

This would reduce the supply of rubber glove exports to the US due to the retention of "unqualified"' gloves at the ports and hence create new sales opportunities for the established rubber glove manufacturers, said OSK Research.

http://www.btimes.com.my/Current_News/BTIMES/articles/RUBROLL/Article/

Latexx steps up expansion to meet demand

Latexx steps up expansion to meet demand
By Ooi Tee Ching
Published: 2009/08/07


Rubber glovemaker Latexx Partners will complete eight more lines by year-end as its orders have stretched until three months ahead


Rubber glovemaker Latexx Partners Bhd (7064) is expanding more quickly than planned to meet the sudden big orders from hospitals in the US, Europe and Latin America in the wake of the influenza A (H1N1) pandemic.

"Demand for rubber gloves has been surging since April. We have to move faster as orders have stretched until three months ahead," its chief executive officer Low Bok Tek said.

"We're just completing Plant 5. There will be eight more lines by the end of this year," he added.

Latexx's cluster of factories on a 20ha site have the capacity to produce 5.2 billion pieces a year. It employs 1,800 workers, most of whom are foreigners.
It is investing RM70 million until mid-2011 to increase annual output to nine billion pieces.

"Rubber gloves are a volume game. We need to expand to reap the economies of scale and maintain our profit margin," Low told Business Times in an interview at the company headquarters in Kamunting, Perak.

"We hope the government is mindful of glovemakers' predicament and will allow us additional foreign workers to facilitate expansion," he said, adding that 45 per cent of its gloves are shipped to North America. Another 30 per cent goes to European hospitals.

Latexx, founded in 1988, offers a product mix of 59 per cent powder-free, 28 per cent powdered and 13 per cent nitrile, or synthetic, gloves. It plans to make more synthetic and fewer powdered gloves in future.

The company currently has total debt of around RM70 million, with RM27 million in cash reserves.

Last week, Latexx reported to the stock exchange that its second quarter profit in the year ended June 30 2009 jumped 10 times to RM11.41 million from a year ago. It attributed the stellar performance to increased sales of rubber gloves at better prices and lower costs from economies of scale.

While Latexx may not be as big as Top Glove Corp Bhd or Supermax Corp Bhd, it is now generating double-digit profit margins close to that of the world's most highly-mechanised glovemaker, Hartalega Holdings Bhd.

http://www.btimes.com.my/articles/latexxx/Article/

Bulls lift Asia stocks near 11-month highs

Bulls lift Asia stocks near 11-month highs

HONG KONG, Aug 6 — Asian stocks edged up close to 11-month highs today on strength in resource-related shares, while the Australian dollar gained after a surprise rise in employment prompted increased bets on higher interest rates.

Developed markets were favoured during the Asian session, with Japanese and Australian stocks posting gains of more than 1 per cent, while shares in Shanghai dropped on nervousness monetary authorities will take more steps to curb lending.

Japan’s Nikkei share average rose 1.3 per cent, led by Honda Motor after a report the world’s top motorcycle maker will import bikes from Thailand to sell in Japan to cut costs.

Camera maker Nikon Corp saw its shares plunge 10 per cent and was the biggest drag on the Nikkei, after it warned of a loss that would be more than double its initial forecast.

Stocks in Shanghai dropped as much as 3 per cent but then cut their losses to 2.1 per cent though the index is still up some 84 per cent this year.

China’s central bank late yesterday repeated that monetary policy will remain growth friendly, sticking with its view that the recovery was not solid, though it said it would use market tools to fine tune policy after unprecedented loan growth in the first six months of the year.

That sparked fears of increasing action by authorities to rein in abundant liquidity.

“Nearly every sector is overvalued and the whole market is very much excessively valued,” said Qian Qimin, deputy research head at Shenyin & Wanguo Securities in Shanghai.

“The market is tired. Investors are tired. Any slight negative news can now turn into the last straw to push down the market, not because the central bank is changing its policy,” Qian said.

Hong Kong shares, however, jumped 2 per cent to an 11-month closing high as early losses were erased by strong buying in China Mobile on speculation the company was on track to list in Shanghai.

Australian stocks rose 1.5 per cent to a fresh nine-month closing high, with banks leading the gains on optimism their earnings would benefit from an improved economic outlook.

Shares in Taiwan and South Korea rose by about a third of a per cent, while Singapore dipped 0.2 per cent.

India topped losses among Asian markets with a 2.5 per cent drop as profit taking resurfaced after a near-19 per cent jump over the past 3-½ weeks.


STILL CAUTIOUS

The MSCI index of Asia-Pacific stocks outside Japan climbed about 0.8 per cent, thanks to strength in telecommunications and materials stocks.

Technology and consumer-related stocks, which have been leaders throughout the rally, were the only sectors down on the day. That suggested profit taking was on the minds of investors after the index hit 11-month highs on Tuesday.

In the United States, network equipment maker Cisco Systems Inc chief executive John Chambers sounded a cautious note on recovery prospects despite giving a revenue outlook that was in line with Wall Street’s expectations.

In currency markets, the dollar was steady against the euro and sterling today as the market awaited key policy decisions by the European Central Bank and the Bank of England, while higher equities weighed on the yen.

Both the ECB and the BoE are seen leaving interest rates on hold at 1.0 and 0.5 per cent respectively, though the market will be looking for whether the central banks have adopted a more optimistic tone on the economic outlook.

The Australian dollar rose 0.2 per cent to US$0.8418, lifted by better-than-expected Australian employment data, while a higher-than-expected jobless rate in New Zealand pushed the New Zealand dollar down 0.4 per cent at US$0.6706. Australian employment increased by 32,200 jobs in July, surpassing forecasts for a 20,000 drop. That fueled expectations that Australia’s central bank will be the first among the Group of 10 countries to raise interest rates.

The Australian 1-year overnight indexed swap, an instrument to speculate on where interest rates are headed, increased by 11 basis points. Dealers priced in 71 basis points worth of tightening over the next 12 months.

US oil for September delivery slipped half a per cent to around US$71.60 (RM250.60) a barrel as fears lingered about the face of the US recovery following weak services-sector data. Still, US$72 remains an enticing obstacle for traders after the contract closed at US$71.97 overnight.

A gauge released yesterday of the US services sector – the biggest part of the economy – surprisingly reflected weakness in July, contrasting with upbeat manufacturing and investment readings. – Reuters

An explanation on what are 'peaks' in a bull market

Thursday August 6, 2009
An explanation on what are 'peaks' in a bull market



IS it time to bail out of the China and Hong Kong stock markets? Are they too frothy already? iCapital says “not by a long shot”.

For one, investor sentiment is still extremely weak and nervous, despite the rally seen in numerous stock markets.

After rising 100% in nine months, the Shanghai Composite index this week plunged 5% in a single day, making investors all nervous and worried that the Chinese government is about to start tightening and cause a hard landing. This is how fragile the current sentiment is.

Peaks in bull markets are made when the markets are unable to continue rising even in the face of continuing positive fundamental news.

Now the situation is such that investors keep buying and worrying that the fundamentals do not improve or would not sustain.

Second, while bank lending in China has been surging, the broad Chinese economy is still not on a sound broad recovery footing. The Chinese government knows that bank loans cannot keep expanding at the current rate.

The leaders and policymakers know that they are navigating a very difficult situation. Too loose a monetary policy for too long a period, China may have an asset bubble in equity and property prices. Too tight a policy too early, one may prematurely short-circuit the current recovery momentum.


China recognises this delicate situation and is also very aware that foreign parties know the fragile state China is in and are ever ready to exploit this to destabilise China.

However, the leaders and policymakers have plenty of experience in handling such types of tight rope situations.

Unknown to most people, China’s unemployment rate has been rising for the last 25-30 years (see chart), thanks to the endless and relentless restructuring of the Chinese economy.

Millions of workers have been retrenched as state-owned enterprises and other organisations restructured. Even the People’s Liberation Army had to downsize.

In view of the restructuring process, the leaders are extremely sensitive to the labour market conditions and are very experienced in handling such delicate affairs. For now, the external demand for China’s products remains weak.

The reliance on domestic sources of growth is of paramount importance. And this will continue to be the case until convincing signs appear that it is time to cool things down.

Many analysts caution on the present market rally, saying that it is all liquidity driven. Meanwhile, the rest of the world is showing more signs of recovery.

Soon, it will be green fields everywhere. When this happens, the depressed earnings will surge and the equity market valuation will look less expensive then.

The same applies to the Hong Kong stock market. Even the initial public offering market is just beginning its frenzied phase.

Even though the Hang Seng index has rallied strongly since its bottom in October 2008, the bull market is still young. No bull market has died at such a young age.

http://biz.thestar.com.my/news/story.asp?file=/2009/8/6/business/4461929&sec=business



Related:

Bubble Trouble
http://myinvestingnotes.blogspot.com/2009/06/bubble-trouble.html

Bubbles and bear markets are two separate and distinct things. Investors truly need to understand the differences. You need to understand which strategy to apply when, and not use a hammer when you need a screwdriver. Once you see the straightforward differences, you will know what to do.

What do you get in SPG and how to use it?

What do you get in SPG and how to use it?

The guide contains critical investment information for all stocks listed on the Main Board of the BMS.

SPG is designed for investors who believe in buying stocks based on their fundamentals. If an investor wants to buy a share based on fundamentals, what type of information would he need?

• Essentially, he would need the most up to date information on the quality, performance and pricing (valuation) of the stock.
• He needs information on the quality of the stock so that he will not overpay for stocks for poor quality.
• He needs data on performance so that the stock he buys will perform well in the future and give him good return.
• Lastly, he needs information on the pricing of the stocks so that he knows at what level to buy the share.

Since the typical fundamental investor is usually a long term investor, he would also need to have a good idea of the future condition and it is of course very difficult to look into the future.

• If an investor is very knowledgeable and is prepared to do a lot of research work, it may be possible to determine the future condition and prospect of a company.
• We are believers of the saying that: "The past is a good indication of the future". Hence the SPG provides you with 12 years of earnings and dividend records as well as three years of financial data and ratios.
• A company with a good track record is likely to continue to do well in the future unless there is a complete change in management.

SPG contains two main types of information:

• Descriptive and
• Statistical.

Descriptive information comprises information on:

• Ownership,
• Activities,
• Corporate Structure,
• Past & Future Performance and
• Capital of the company.

This section is mainly designed to give the readers an idea of the performance and quality of the company in terms of its strategy, earnings and assets management.

SPG briefly discusses qualitatively the immediate past, current and future earnings prospects of the company. SPG does not discuss the historical earnings trend apart from that of the previous year as this data is available in another part of the report.

The descriptive part of the report, seeks to provide you with some fo the answers to the "WHAT stock am I buying?" questions.


Stastistical information is made up of two parts:
(1) Critical stock market information, for 12 years or from the year of listing, comprising of the

• Annual Price Range,
• EPS,
• DPS,
• DY Range and
• PER Range.

(2) Financial information comprising of Summary Statistics from

• the Balance Sheet and
• Profit & Loss Statement of the company as well as
• a collection of Critical Financial Ratios.

This is probably the most improtant and unique part of this publication. The information provided is in the form of data for each year. The annual stock performance figures, be they price, EPS or DPS, may not be enough in themselves.

Serious investors may like to take a longer view by seeing how the figures may have changed over the years. That is, what are the historical growth rates of the price, EPS and DPS of a stock from the past.

Furthermore, owing to the fact that the performance for a particular year may be very good or very bad, the DY and PER figures would be seriously distorted. It is sometimes more useful to look at the average figures rather then the individual year's figures.

The Statistical part of the report is used more for answering to the "WHICH stock to buy?" and the "WHEN to buy a stock?" questions.


Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.

Nickel Price Graph

http://www.lme.co.uk/nickel_graphs.asp

SPG guide on capitalisation changes

Internal capitalisation changes are those capitalisation changes which affect the number of shares held by the pre-existing shareholders (i.e. bonus, rights, splits, etc.).

Shares issued to outsiders in the case of share swaps, special issues, etc., do not affect the number of shares held by the pre-existing shareholders.

SPG does not believe that bonuses increase the value of shares, and advise investors not to pay much attention to the past number of bonus issues.

We look at rights in another light, however, as we are not in favour of rights issues unless the company has been an exceptionally fast growing ones (i.e. growth in excess of 20% per year). In other cases, a company which has issued more than one rights in the past decade ought to be viewed with caution.

It is perhaps worth pointing out that a company which has many capitalisation changes all bunched together during a short space of time without a concomitant increase in earnings could be trying to impress its sharehodlers and the stockmarket. Historically, such companies usually performed poorly after such capitalisation changes were over.

Any existing issues which will lead to future dilution should be noted. Dilution means the creation of extra number of shares which will cause the per share earnings and dividend to decline. Normally, dilutive issues include warrants (TSR) and convertibles. By comparing the number of new shares which will be issued with the existing number of shares, the user would have an idea of the potential dilution.

For example, if a total of 100 million new shares will be issued and the exisitng number of shares is 300 million; the potential earnings dilution would be 25% without taking into consideration the notional interest saving. That is the EPS will decline, say, from 10 sen per share to 7.5 sen.

Fixed income securities (i.e. bonds etc) issued by the company should be considered too.


Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.