Is there any difference between a 2 for 1 stock split and a 100% stock dividend?

Question

A 2:1 stock split, and a 100% stock dividend seem to have the same effect. Is this really the case, even behind the scenes? Is a 2:1 stock split just a synonym of a 100% stock dividend, or are there legal and accounting differences? If there are differences, how are they significant to the retail investor?

Answer 1

A stock dividend means that you receive additional shares in the company instead of cash and they are not taxed until the shares are sold.

Like stock splits, stock dividends dilute share price. They do not increase shareholder wealth or market capitalization. There's no difference unless there's a conditional attachment that requires that the stock dividend shares cannot be sold for a period of time.

Here's a more in depth explanation with some examples.

Answer 2

The issue is whether or not the company is creating new shares vs distributing already-existing shares not included in the public float (until paid as stock dividends, committed via Options awards, or included in company retirement plans, etc.). I think this is the crux of your question.

A company will pay a STOCK DIVIDEND from Treasury Shares: shares it owns, but hasn't registered or made available for public trading. You receive shares worth the current market price*the # given to you. Critically, there is no dilution of yours or anyone else's ownership from the company doing this. But the main difference between a STOCK DIVIDEND and a STOCK SPLIT is this: **A STOCK DIVIDEND is worth more than the shares you already own.

A STOCK SPLIT is little more than a marketing device designed to lower the current market price of the stock making it more attractive to people who naively believe that a stock's Price is somehow indicative of its Value**. They believe that the higher the price, the more expensive the stock. This couldn't be farther from the truth. However, human psychology being what it is-- and companies being well aware of this fact-- stock splits happen all of the time as a way to drum up (or keep the river of) dumb money flowing into their "affordable" stock. Example: XYZ corp has run up in price from $20 to $100. At $100 many retail investors believe the company is "expensive". It probably is... but not because of the Price. It's because of the Value. A company at or above Fair Market Value would be truly "expensive". But the company might have been expensive at $30, too. When they split their shares, say, 5:1, everyone gets 5 shares for each share currently owned and the public market price of the company goes from $100 down to a "more affordable" $20. Rinse and repeat.

Companies do the same thing for similar reasons in reverse. a Reverse Split will exchange 1:10, which has the effect of increasing the current stock price, making the company look like they're doing better than they are in many cases. A company whose stock has lost much of it's market value will do this. Example: the price of their stock has fallen from $50 to $1. They do a 1:10 reverse split and raise their stock's price to $10... which is at least respectable on the surface.

A stock split doesn't provide anything of value to the current shareholders. If your stock was worth $5,000 yesterday, it's still worth $5,000 today. You just have twice as many shares (again, if it's a 2:1 split).

If a company's market capitalization was $100 million prior to the split it will be $100 million afterwards, too. The share count might have doubled, but you'll notice that the stock price is halved, too (if it's a 2:1 split). 2x the shares at 1/2 the price. Nothing has changed.

As for the dividend:

Not all shares originally issued by a company are publicly traded. Some of those shares are held by the company and not made available unless pursuant to a registration. These are called TREASURY SHARES or TREASURY STOCK. You can see this (by implication) when you look at a company's financials on a site like Yahoo! Finance. There will be a reference to "Public Float". or "% Public Float". These are the shares that are publicly traded. If that number is not <100%, which is extremely rare, that tells you the company has Treasury Stock and/or some other shares restricted from public sale in some way (part of the company's retirement plan, connected to Stock Options issued as incentives, held as part of a deal with "strings attached, etc.). These shares all exist, but can't be publicly traded until registered or their restriction has been lifted in some way.

Another way you can see this is in the line item on the company's financials right under "Shares Outstanding" usually marked: "FULLY DILUTED SHARES OUTSTANDING". This number approximates the ACTUAL number of all shares issued by the company, including shares attached to options that will most likely be exercised, etc. When calculating a company's Earnings Per Share most people do a quick and dirty calculation based off of the wrong number, i.e., they use the Shares Outstanding. The most accurate analyses use only "Fully Diluted Shares Outstanding". Many times this is an elusive number and professional analysts will calculate this number after pulling together share references from a variety of places (including the aforementioned Stock Options).

To sum it all up: a STOCK DIVIDEND is paid from Treasury Shares, providing the recipient with something of value just like a cash dividend and removing an asset from the company's books (which actually decreases the value of the company in proportion to the value disbursed, just like a cash dividend does and which you can see on ex-dividend day when the shares open down by the amount of the dividend declared... in theory in many cases).

A STOCK SPLIT's only relationship with a company's value is in management's hope that people will naively believe that it indicates that the company's shares are now more "affordable" or "less expensive",increasing demand for the stock for a while. If you think a stock is expensive because of the price, buy fewer shares. Cost is share # * Price. You will have the same exposure to the company based on underlying value if you buy that single share or 100 shares at 1/100th of the price.

Hope this helps.

BTW-- while a stock split is technically "taxable" when you sell the shares, it doesn't increase or decrease the tax you would have owed upon sale of the shares you had prior to the split. It doesn't change your basis in the shares for accounting purposes. It's as if you had a chocolate bar that was broken into smaller bits. You've still got the same amount of chocolate... and it's the same chocolate you had before. A stock dividend is more chocolate.

Izzy

Answer 3

There are accounting differences. Consider 100,000 shares of par value $1.

2-for-1 stock split

When there is a 2-for-1 stock split, the par value is halved to $0.50 and the number of shares is doubled to 200,000.

100% stock dividend

Under US GAAP, a 100% stock dividend is considered a large stock dividend, which means that the par value of issued shares is debited from Retained Earnings and credited to Common Stock. For a 100% stock dividend in this case, 100,000 shares are issued, and the total par value of newly issued shares $100,000. Therefore, Retained Earnings is reduced by $100,000, and Common Stock is increased by $100,000.

For more details, read my answer to this question: Why is a stock dividend considered a dividend? What makes it different from a stock split?

Answer 4

A Stock Dividend is taxable when you get the dividend.
A Stock Split is taxable when you sell them.

It’s pay (taxes) now or pay later.

Answer 5

(edit - Whoops! Completely missed that this question is about a dividend paid in stock, rather than cash)

These are completely different things:

Dividend: The company takes money out of their bank account and gives that money to each shareholder. No shares change hands. All else being equal, this usually causes the shares to drop a bit (roughly equal to the amount of the dividend), as the company now has less money.

Stock split: The number of shares doubles universally. Everyone who had one share, now has two. That's it. All else equal, the share price roughly halves (in a 2:1 split), as there are twice as many shares and presumably the total value (market cap) of the company has not changed. In practice there is some idea that a cheaper share price might induce more buyers and slightly elevated the price after halving it, but no guarantee of that.