Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Corporate Actions: Playing on the minds... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 7, 2004

    Corporate Actions: Playing on the minds...

    The share price traces a company's earnings potential and long-term growth. However, in the short term, there are many factors that outweigh long-term fundamentals. These factors could be 'tips', economic news resulting in over-optimism and last but not the least, corporate actions. It is therefore said that a retail investor should do what the promoter of the company is doing.

    Let us now look at the various indications that corporate actions give to a common investor:

    • Share buy-backs (Do what the promoters do?):  Recently, on 9th June 2004, Reliance Energy came up with a buyback offer at a share price of Rs 525 each. Usually, buyback programs are an indication of the fact that the current market price is perceived to be cheap by the company. As a result, it would make economic sense for the promoters to up their stake in the company. Buyback is also a value creation exercise for shareholders. Not only does the buyback price become a 'base' price at times, it also gives an attractive exit option for the shareholders.

    • Promoters' stake sale:  This is exactly the opposite of the first case. In FY04, stock witnessed record high levels, led by mid-cap stocks and at this juncture, promoters of the company were selling off their stake, either through open offers or through private placements. Most of the times, promoters' stake sale is considered to be a negative for the stock, as it indicates that the management wants to 'cash-in' on high prices, which they do not think are justified. Secondly, it also indicates the confidence of the management. The promoter can either sell a part of the existing shares or place a new lot with some investors that automatically result in promoter stake dilution. In case of issue of new shares, investors should understand what the company plans to do with the money that was raised? If it is for new investments or funding existing businesses, it is good. Otherwise, it only dilutes earnings per share.

    • The dividend controversy:  It is the basic aim of any corporate entity to reward its shareholders either by way of capital appreciation or by way of rich dividends. As a retail investor, it is important to note the growth stage of the company in which you remain invested. In case of a high growth or an expansionary phase, the company would have a very high retention ratio (i.e. retain a large part of net profit for more investment in existing business) and therefore would pay out less by way of dividends. There is nothing wrong in declaring low dividends if the management feels that it could generate more profitably by investing in assets. While on the other hand, in a stable growth stage, the company need not retain a large portion and the payout ratio could be larger (take the case of Hindustan Lever in the last four years). It is advisable to look at the annual reports of the company to understand the management's outlook on the existing business and its investment plans. If the company does not have significant investment plans, as a shareholder, you have every right to question the management in case dividends are lower.

    • Quarterly announcements:  As per the Securities and Exchange Board of India (SEBI) guidelines, the listed entities have to declare results on a quarterly basis. It is perceived that the results may not be too encouraging when the declaration is expected on Friday, i.e., the 'Friday effect'. From a long-term investors perspective, too much emphasis on quarterly performance is not the right way to judge the management's ability. Some businesses are seasonal and some projects may take time to gain economies of scale and so on. Quarterly results only enable an investor to judge whether the company is moving in the right direction or not.

    • Analyst meets:  Other typical corporate actions are analyst meets and broker conferences (wherein top institutional investors gather at one place and the company presents its growth strategy, which is typically organized by a broker/merchant banker). While these are restricted to a few set of investing public, we believe that there is also a case for retail investor conference as well. Why should the management give too much importance to institutional investors and not the shareholder (though annual general meetings are held once in a year)? Most of the top corporates put up the analyst presentations on their website, which a retail investor should access to keep himself updated.

    As per the SEBI regulation, a corporate is supposed to disseminate price sensitive information to the exchange at the same time. Though SEBI has been making significant efforts to improve the disclosure norms, there has to be overall effort from the corporate side as well. Sometimes, this has been found wanting. The objective of this article is to once more highlight the need for the retail investor to keep abreast with the news flow that is emanating from the company.



    Equitymaster requests your view! Post a comment on "Corporate Actions: Playing on the minds...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 (Close)