Does the SEVN stock dividend increase its marketcap?

Short answer: No.

But what’s the fun in that? First, let's get some of the facts down. Philippine Seven [SEVN 120.90 ?5.1%; 79% avgVol] declared a 100% stock dividend, which means that on August 15, each person who owns a share of SEVN will receive another share of SEVN as a dividend. They don’t have to pay to receive this share, it just gets airdropped into their brokerage account. Before the stock dividend, SEVN will have 756,418,283 outstanding shares. The stock dividend will double its outstanding shares count to 1,512,836,566. Market capitalization (“marketcap”) is calculated by multiplying the number of outstanding shares by the current market value of one share.

Ok, now that we got all that out of the way, let’s take a closer look. Using Friday’s closing price of P120.9/share, SEVN’s marketcap before the dividend will be somewhere in the neighborhood of P91.4 billion (120.9 * 756,418,283). After the stock dividend, SEVN’s outstanding shares will double, but what those shares represent won’t have changed at all. The SEVN “pizza” that was once split into 756,418,283 slices is now split into 1,512,836,566 slices; there’s still the same total amount of “pizza”, but what was once represented by one share is now represented by two shares. This means that the price of SEVN’s stock on the day the dividend is paid out will be halved as compared to its previous closing price.

If this adjustment didn’t occur, a stock dividend would be a game-breaking free money glitch! So while I don’t know what SEVN’s market price will be the day before the dividend is paid on August 15, let’s just use the same Friday closing price of P120.9/share to calculate. Take the previous close, divide it by two to get the new per-share price of the post-dividend stock (P60.45), then multiply that by the new number of outstanding shares (1,512,836,566) and you still get P91.4 billion. The stock dividend doesn’t increase the marketcap because it doesn’t increase the size of SEVN’s pizza, it just splits what is already there into a higher number of slices.

MB BOTTOM-LINE: A stock dividend operates like a stock split. Here, SEVN is basically doing a classic “two for one” stock split where one share of SEVN magically becomes two shares. The classic argument in favor of a move like this is that it makes the stock price look more affordable (P60.45/share looks cheaper than P120.90/share) and increases liquidity by doubling the number of shares in circulation. In my experience, a big stock dividend or stock split doesn’t carry the same psychological weight that it once did. A move like this (in my opinion) doesn’t magically make an illiquid stock suddenly bursting with life and liquidity. That said, SEVN isn’t (usually) an illiquid stock. It usually trades in the millions on the daily, and like we just outlined with our math above, the stock div/split won’t change the value traded figure at all. It will theoretically double the volume traded as expressed in shares, but that’s about it. I don’t know if my analysis holds at the extremes (super high stock prices and super low stock prices), but for anything in the realm of normal (P1 to P1000) it’s basically not going to change anything.

Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.