COMMON STOCK

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COMMON STOCK
CHAPTER FIVE
Practical Investment Management Robert A. Strong
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Corporations, Shares, and Shareholder Rights

• People who own stock have an equity
• interest in the organization.
• If a business has shares of stock, it is
• organized as a corporation rather than a
• proprietorship or a partnership.
• The shares of some corporations are closely
• held, while others are publicly held.
• The two types of stock are common stock
• and preferred stock.
• Common shareholders have a residual claim on the
  assets of
• the firm after the bondholders and other
  creditors
• Preferred stock have a higher claim order than
  common stock - Has significant amount of
  interest rate risk

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Shareholder Rights

• The right to receive declared dividends on a pro
  rata basis (in proportion to the shareholders
  ownership interest in the firm)
• The right to vote on matters of interest to the
  corporation such as the election of the
  board of directors
• - Some companies have more than one class of
  stock
• (different dividend payouts, different voting
  rights)
• - Shareholders can vote in person or cast
  absentee ballots by a) mailing in proxy
  statement, b) calling in by phone, or c)
  vote on the internet
• The right to maintain ownership percentage
• - The mechanics of the preemptive right are
  accomplished by a rights offering . Rights are
  actual securities that allow its holder to buy
  new stock at below market price. An investor can
  choose to
• a) use them to buy shares, b) sell them to
  someone else, or
• c) let them expire (throw money away?)

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The Mystique of Dividends Types of Dividends
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The Mystique of Dividends Types of Dividends
Selected Dividend Reinvestment Plans
DISCOUNT FROM FIRM MARKET
PRICE Chase Manhattan Bank (CMB,NYSE)
5 Central Maine Power (CTP, NYSE) 5 Green
Mountain Power (GMP, NYSE) 5 Hibernia Corp.
(HIB, NYSE) 5 York Financial (YFED, NASDAQ)
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The Mystique of Dividends Types of Dividends
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The Mystique of Dividends Special Distributions

• Spin-offs - a parent firm divests itself of a
  subsidiary, and all the shares in the
  subsidiary are distributed proportionally to the
  shareholders in the parent, there
  is no choice to be made
• Example PepsiCo spin-off Tricon Global
  Restaurants, currently known as Yum! Brands
• Split-offs - a parent firm divests itself of a
  subsidiary, and the shareholders must make
  a choice between keeping shares in the parent, or
  exchanging them for shares in the
  separated subsidiary
• Example Cooper Industries (electrical equipment
  and automotive products) split-off Cooper Cameron
  (oilfield activities)

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The Mystique of Dividends Special Distributions

• An increasingly common type of
• recapitalization is the issuance of shares called
  tracking stock
• These shares track the performance of a
• subsidiary, and in many respects, are just a new
  class of shares
• Allow potential investors to choose to invest
• in a particular segment of a corporation
• Example Disney and Go.com

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The Dividend Payment Procedure

• A dividend paid in accordance with a
• previously announced corporate policy is a
  regular dividend
• Companies usually pay dividends quarterly
• A firm that wishes to make an extra
• distribution of cash to the shareholders does
• so through a special dividend, also called an
  extra or extraordinary dividend
• Example Microsoft

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The Dividend Payment Procedure
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Why Dividends Do Not Matter

• Paying dividends reduces the amount in a
• firms checking account, and hence the shares are
  worth less.

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Stock Splits Forward and Reverse Splits

• A stock split is an accounting decision to
• change the number of shares outstanding without
  selling any more to the public.
• With a forward split, also called a regular way
• or direct split, shareholders end up with a
  greater number of shares than before the split.
• With a reverse split, the number of existing
• shares is reduced.
• Example ATT 1 for 5 reverse split in Nov. 2002

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Stock Splits Why Stock Splits Do Not Matter
The value of a firm cannot be increased by
splitting, or combining, its shares.
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Why Firms Split Their Stock

• The primary motivation for a stock split is
  usually a desire to reduce the share price
• Firms state a desire to broaden an ownership
  base
• Large reverse splits often reduce the number
  of shareholders, used to consolidate
  control
• The difference between a stock split and a stock
  dividend is purely an accounting phenomenon.
  With a stock split, the par value of the stock
  changes by the split factor. With a stock
  dividend, the par value is not affected
• Compare a 5 for 4 stock split with a 25 stock
  dividend

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The Financial Page Listing
52 Weeks Yld Vol
Net Hi Lo Stock Sym Div PE
100s Hi Lo Close Chg 25.38 20.38
AtlanEngy ATE 1.54 7.2 12 371
21.25 20.88 21.25 .13
Yld Dividend Yield (annual dividend / current
stock price) PE price earnings ratio (current
price/most recent annual earnings per share)
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The Financial Page Listing
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Categories of Stock

• A Blue chip stock usually has a
• long history of uninterrupted dividends.

• Income stocks are those that historically
• have a higher-than-average dividend payout ratio
  (the proportion of net income after taxes paid as
  a dividend).
• A Cyclical stock is one whose fortune is
• directly tied to the state of the overall
  national economy.

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Categories of Stock Blue Chips
Insert Table 5-2 here.
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Categories of Stock Income Stocks
Insert Table 5-3 here.
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Categories of Stock Cyclical Stocks
Insert Table 5-4 here.
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Categories of Stock

• A Defensive stock is largely immune to
• changes in the economy.
• Growth stocks reinvest most of their
• earnings rather than paying them out as dividends
  and may be good candidates for above-average
  returns.
• A Speculative stock has a high probability of
• a loss and a small probability of a large profit.
• Penny stocks refer to unusually risky,
• especially inexpensive shares.

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Categories of Stock Defensive Stocks
Insert Table 5-5 here.