In Nigeria, stock investing has always been thought to be an exclusive privilege of the rich or corporate and institutional investors. But in the past few years, retail investors have started making inroads into the market although retail investor participation in the Nigerian market has still been relatively low.
Available data and information indicate that retail investors make up only about 3% of stock market participants in Nigeria, a very low number when compared with such places as Malaysia with 9%, the United Kingdom with 13%, or South Africa’s 13% and United States of America’s 43% retail investor participation. Different reasons may be adduced for the low retail investor participation in the Nigerian stock market.
The government, through the SEC has and continues to pursue some initiatives to encourage and educate retail investors to participate more in the capital market. It is believed that as financial education takes hold among the populace, retail investor participation will increase.
Corporate organisations also need to complement or augment Government initiatives and efforts to encourage retail investors and it does not look like this has been the case. A way that corporates can do that is by making stock prices affordable to retail investors and one way to get that done, is by stock splits.
The case for Nestle
One company that we think is due for stock split is Nestle Nigeria Plc. There is no doubt that Nestle Nigeria Plc is the most expensive stock in the Nigerian stock market. A share of Nestle Food Plc recorded an all-time high of N1,615 on April 27th, 2018 although its current price of N1,485 per share as at September 11th indicates a falling price trend, it is still the priciest stock in the Nigerian stock market. The share is the only stock in the exchange with a four-digit price tag.
Broadly speaking, the Nigerian stock market has only about 4 stocks whose prices are in the 3 digits, Seplat Petroleum Development Company Plc, Dangote Cement Plc, Total Nigeria Plc, and Mobil Oil Nig. Plc and they are all in the lower three figures. There is no doubt that Nestle Food Plc is lonely up there as the only four-figure priced stock and a stock split will be beneficial to both Nestle and the investors.
What Is Stock Split and How Does It Work?
A stock split is a corporate action, where a company increases the number of its outstanding shares in such a way that the proportionate ownership of shareholders remains the same. Different markets have different names for stock split.
In the UK, it is known as capitalisation issue while in Nigeria, it is known as bonus issue but in the US, it is called stock split. There is also a reverse stock split, (opposite of a stock split) which is a situation where a company decides to reduce the number of its outstanding shares while maintaining the proportionate ownership of shares by shareholders.
While a stock split results in a reduction in price per share, reverse splits increase price per share. Stock splits are good for “expensive” stocks while reverse split works well for “penny” stocks. When there is a 2-for-1 split, the number of shares you hold doubles but the per share price becomes half of what it was before the split leaving the market value unchanged.
On the other hand, a 1-for-2 reverse split will reduce your shareholding by half while the per share price is doubled, again, leaving the market value unchanged.
Stock split should not be confused with stock dividend because stock dividend is a form of corporate action where a company decides not to pay dividend in cash but instead, issue more shares to existing shareholders. In most cases, stock dividend is an elective or optional corporate action event where the shareholder elects or decides whether to accept the additional shares or to receive cash dividends instead. On the contrary, a stock split is a mandatory corporate action that shareholders cannot opt out of.
Effects of Stock Split
One effect of stock split is that it reduces a company’s retained earnings in proportion to its share capital. Stock split does not affect the market capitalisation, nor does it affect the dividend yield of the affected share. It is not dilutive.
More importantly, (this is the major reason why Nestle Food plc should split), stock split lowers the price of the stock in question and make it affordable to all investors, especially retail investors who may have been put off by the hitherto very high price. In addition, splitting a stock increases its liquidity by increasing the number of trading transactions that occur each trading day.
Stock split also comes with a positive psychological appeal as investors see companies that split their stocks as growing. For Nestle plc, a 5-for-1 split will bring the price down to about N300 per share while a 10-for-1 split will reduce the price further to N150 per share. By so doing, shares of Nestle Food plc will become affordable to many more Nigerians, trading activities will increase, and investors will be positively disposed towards Nestle Food shares.
For Nestle, the time to split is now.