The wealth of Kenya Re investors has dropped by nearly a quarter or Sh1.9 billion since award of bonus shares to investors, signifying a selloff by shareholders in the aftermath of the grant of the new units.
Kenya Re’s market capitalisation has fallen by 24.3 percent from Sh7.9 billion on June 25 when the company closed its register for the bonus shares to Sh5.9 billion on Wednesday this week with the share price falling from Sh2.83 to Sh1.07 in the period.
The company’ share price fell immediately after the register closed for the bonus mirroring exits by investors anticipating halving of the stock price after the listing of new shares.
Bonus share issues are usually expected to leave the market capitalisation of a company unchanged even as the share price is discounted to factor in the increased supply of stocks in the market.
Kenya Re issued one bonus share to investors for every one share held, doubling the supply of the company’s stock on the NSE from 2.79 billion shares to 5.59 billion shares.
The market capitalisation of the reinsurer was widely expected to hold at Sh7.9 billion even as the share price corrected but the paper wealth has receded further to fall below the closure date for the bonus shares.
Companies will mostly issue bonus shares to encourage more retail investor participation in their stock by lowering the price per share and adding liquidity/supply.
Bonus share issues and stock splits in other markets in recent years have incentivised demand for the respective company stake, driving up prices for the counters subsequently.
Companies such as Apple in the US have seen their share prices rise after stock splits as retail investors take advantage of the low price per unit to acquire shares of the firms.
Bonus shares are also regarded as an alternative to issuing a dividend payment to reward investors and are also viewed as a signal of a company’s financially sound position.
Firms pay for the bonus share issues using cash reserves generated from profits or their shares reserve.
Stock splits do not necessitate a change in reserves as they are unfunded making them alternatives to the reserve funded bonus shares.
Bonus shares may be viewed by some investors as negative as they do not generate cash for the company and neither do they change the fundamentals that drive returns for investors.
Kenya Re rewarded its shareholders with both bonus shares and a dividend covering its operations for the year ended December 2023, raising the payout to 30 cents per share from 20 cents previously. The bonus shares did not qualify for the dividend.
The reinsurer’s net profit rose to Sh4.9 billion in the year from Sh3.5 billion prior, anchored largely on higher investment income in the period including a net foreign exchange gain.
The company, however, saw its half year net profit to June 2024 decline marginally to Sh1 billion from Sh1.1 billion as the investment income shrunk from a net foreign exchange loss in its regional operations.
