Disclaimer

The purpose of this article is to give you a general understanding of what corporate actions are and how they might affect your portfolio.

All examples are for illustration purposes only and may have different implications on the assets you hold. All prices and values are devised for simplicity reasons and are not reflective of real scenarios, as they do not include any commissions or fees.

What are corporate actions?

When a company issues a corporate action, it is initiating an internal process that can directly affect the securities issued by that company.

There are different types of corporate actions. Some can be concerning financial matters, such as bankruptcy or liquidation, and others are concerning corporate matters. Some are mandatory, which will be executed automatically; others are voluntary, which will require your response within a specified period of time.

This article will talk about the two most common corporate actions, which most of our clients are experiencing: Cash Dividends and Stock Splits.

For further and more in-depth information about corporate actions, please conduct your own research and reach out to us directly.

Cash Dividends

Some companies decide to reward their shareholders by paying out dividends. The exact amount per share is decided by the board of directors and comes out of the company's earnings.

In this example, from APPLE INC. (AAPL.US), you can see the past dividend payouts with their payout dates and amount per share.

The stated dividend amount is displayed in gross, as the dividends are taxable income.

By default, as a non-US citizen, you will have to pay 30% tax on all incoming dividends from US securities. However, the US has a Double Tax Treaty (DTT) with many countries, which may provide you with a lower tax benefit. By filling out the W-8BEN form, you are claiming a reduced rate according to your tax residency. Find out how, here.

To be eligible for dividend payments, it is important to note you must be holding the share before the ex-dividend date (cut-off date). If you purchase the share on or after the ex-dividend date, you will not be eligible for receiving dividends on the next payout.

Stock Splits

In a stock split, a company divides its existing stock into multiple shares to boost liquidity. By doing so, the dollar value of the shares remains the same, as the split does not add any monetary value.

Example:

You own 10 shares of company ABC. Each share is currently worth $10, which results in a total of $100 worth of ABC stocks.

Company ABC is now performing a 2-for-1 stock split. That means, that for every 1 share you own, you will now receive 2 shares instead. However, as the number of shares are being doubled, the value of each share is also halved.

That would leave you with 20 shares of ABC, where each share will be worth $5, which results in the same $100 total ABC stock value.

The split factor is decided by the board of directors. Most commonly, we see 2-for-1 or 3-for-1 splits, however, any factor can be possible. Any company can also perform as many splits as they see fit.

The most common reason (including but not limited to) for a company to issue a stock split is to boost the liquidity of its shares.

Reverse Splits

As the name indicates, reverse splits are the opposite of standard stock splits.

This corporate action consolidates the number of currently existing stocks into fewer shares.

Example:

You own 10 shares of company ABC. Each share is currently worth $10, which results in a total of $100 worth of ABC stocks.

Company ABC is now performing a 1-for-5 reverse split. That means, that for every 5 shares you own, you will now receive 1 share instead. However, as the number of shares are being reduced, the value of each share is increased equally.

That would leave you with 2 shares of ABC, where each share will be worth $50, which also results in the same $100 total ABC stock value.

The most common reason for reverse splits is to increase the value of its price shares.

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