• Companies seek to drive the value of their shares through stock splits or share buy-backs

• However, the data show the desired outcome is uncertain

• Jamaica Observer analysed three companies which did a stock split and three which bought back their shares

ARE stock splits and share buy-backs effective in raising the value of a company? We looked at the results of those corporate actions on the share price of six companies — three which did a stock split and three which bought back shares and found the results were uncertain.

STOCK SPLITS

A company deciding to execute a stock split does so because they deem the price to be too high to entice investors to buy. Executing a stock split increases the number of shares available for a company to current shareholders. Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionately, while the value of the company does not change.

Jamaican Teas

In its history, Jamaican Teas, a company that is traded on the Jamaica Stock Exchange (JSE), has gone through three stock splits. The 3:1 stock split that took place in November 2020 is the main topic of this article. On October 8, 2020, the JSE announced the stock split. At that time, the stock price was $5.19, up over $1.50 since March of that year where it closed at a record low of $3.73. The stock price increased by an additional $0.88 in the two months preceding the split, reaching $6.07 on November 26, 2020. The price was adjusted from $6.07 to $2.01 on November 27, 2020, the ex-split day.

The share price thereafter dropped and stayed below the $2.03 post-split value for roughly two months. The share price did, however, start to rise in January 2021 and eventually reached $4.31 by June of that same year. Notably, the company’s directors traded shares in over 35 different transactions during this time period, which may have affected the share price’s rising trend. The stock price increased in volatility from June 2021, peaking at $4.48 in October before falling to $3.67 in December 2021. In the short term, a period that would have normally been a difficult time for the share price due to COVID, the share price increased for about six months. Possibilities include the well-executed stock split, wise business choices, or the frequent trading by the directors as causes of this upsurge. However, after approximately two years, on November 30, 2022, the share price settled at $2.49, representing a marginal increase of only $0.48 compared to the post-split value.

Salada Foods

Salada had a stock split on March 31, 2021. The initial notice of consideration of this stock split was made by the JSE on January 12, 2021, when the stock price was $28.22. The stock increased by another $15.89 in the subsequent two months between the time the stock split was announced and when it was scheduled to take place. On March 30, 2021, the stock price adjusted from $44.11 to $4.41 with the 10:1 stock split taking effect on March 31, 2021. By the next day after the stock split, the price jumped to $6.13, 39 per cent above the original price before the stock split. The share price continued to rise for the next month, reaching $9.77 on May 5, 2021. After the spike between March 30 and May 5, the share price started to decline. After two years, on March 30, 2023, the share price was $3.50, less than the price before the stock split. In the short run, the stock split was strategic. The stock price significantly improved which created outsized opportunities for some investors and resulted in more trading in the company’s shares. However, after nearly two years, the share price shrank by $0.91. In the long run, this stock split did not maintain a high share price, but in the short run, the reduced price increased demand.

Derrimon Trading

Derrimon Trading also did a stock split. On September 6, 2018, Derrimon Trading did a 10:1 stock split, bringing the high share price of $26.49 to $2.65. Before the split, the share price had increased rapidly in early July to $19.16 and had been roughly stable until the split, with the exception of one blip in mid-August. After the stock split, the price increased very minimally. The highest it has reached since the split was $4.00 on September 10, 2018. The stock split did not give the shares more demand due to lower price and as a result, the share price has not changed substantially since 2018. Two years later, the stock price was $2.50, $0.15 lower than the original price after the split. The stock split did not have the typical effect on the share prices as seen with prior stock splits.

SHARE BUY-BACKS

Share buy-backs are less common than stock splits in Jamaica but are another method of increasing share prices and creating value for shareholders. However, instead of smaller nominal prices to increase demands like stock splits, share buy-backs decrease supply and often show that the company thinks the stock is undervalued, a good sign of investors.

Kingston Properties

Kingston Properties started a share buy-back in April 2016. The company wanted to buy back 1 per cent of its shares, deeming them to be undervalued. The announcement of the company’s intentions came out on April 28, 2016, when the share price was $6.47. By May 3, the share price started increasing from $6.47, and by May 25 the share price reached $9.97. This was more than a 50 per cent increase. The share price remained relatively stable but dropped on December 30 to $14.27. However, this drop did not last long, and the share price quickly rebounded to $16.31. This was a 152 per cent change from the share price before the beginning of the buy-back. That price remained stable for about two months until the share price decreased and started fluctuating again. Two years after the announcement of the share buy-back, the share price was at $6.60, which translates to $13.20 after accounting for the May 2017 2:1 stock split, meaning that the share price still increased after the share buy-back. This increase in share price cannot be solely attributed to the buy-back as a stock split did also occur in May 2017, which could have also raised prices.

Eppley Caribbean Property Fund

In July 2020, Eppley Caribbean Property Fund Limited decided to buy-back up to 500,000 of its shares under the net asset value per share. Eppley Property’s board of directors deemed the net asset value per share to be the best way to value the company and concluded that shares being sold for less than the calculated price were undervalued. The announcement of the share buy-back was made public on July 27, 2020. On that day, the company’s shares were worth $46.10 each. Over the next two days after the announcement, the share price dipped, but on the third day, it started rising from $42.69. It kept rising until September 22. At that point, it was $57.00. After that, the share price declined again. The share buy-back seemed to increase share prices in the short run, but after three months, the price fell again. By November, the price fell to $41.00, lower than before the share buy-back started. After two years, on July 27, 2022, the share price was $41.00. The share buy-back had great impact on Eppley Caribbean Property’s share price in the short run. However, it did not create enough demand to keep such high share prices over a two-year period.

JMMB Group

JMMB Group planned to conduct a share buy-back of up to an amount of $300 million over a one-year period beginning on April 1, 2022. What is interesting about this share buy-back is that JMMB announced the buy-back four months before, on December 6, 2021. The board of JMMB determined that the stock was undervalued and therefore decided to pursue the stock buy-back. Just before November 25, the share price of JMMB Group was fluctuating, around $38.55, but spiked around $3.00, nearly two months after the announcement. The stock price rallied from $44.39 on March 31, 2022, to $52.86 on April 5 based on the expectation of the buy-back starting in the new financial year. A new all-time high of $61.24 was also achieved on April 5 as well. However, due to restrictions from the Trinidad & Tobago Securities Exchange Commission, JMMB Group has not been able to execute the share buy-back. By April 2023, the company’s share price was $29.82, below the value of the shares before the stock buy-back was announced. This is very interesting because it means that even though the company thought its stock was undervalued, investors did not react considerably to that news.

Conclusion

Overall, while stock splits and share buy-backs are executed with the aim of boosting the value of companies, the data are unclear on the actual out-turn. The sample of companies we studied showed that while a stock split increased the share price quickly for two out of the three companies evaluated, in the case of Derrimon Trading, investors did not respond to a lower share price, and it has been stable since the stock split. The share prices of both Kingston Properties and Eppley Caribbean after share buy-backs both increased after the share buy-back programme was announced, but Eppley Caribbean Property’s did not sustain this growth in the short run. JMMB’s share buy-back could not go through, but it demonstrated that even though a share buy-back programme means that a company thinks its stock is undervalued, the outcome of the market action may not be what the company desired.