In its latest 8K filing with the Security and Exchange Commission (SEC), Tesla, Inc. (TSLA) announced that it plans to seek approval for a stock dividend during its Annual Shareholders' Meeting to be held later this year. If approved by its investors, Tesla will be able to issue additional stock after a final approval by its board of directors. The news sent Tesla's stock price up by 5% in premarket trading. However, a stock dividend is substantially different than a cash dividend, and whether they benefit shareholders at all is debatable.
- Tesla is planning a stock dividend after it gets its shareholders' approval.
- Stock dividends have much more in common with stock splits than they do with cash dividends.
- Initial reactions have sent Tesla's shares soaring over 5% in premarket trading.
Stock dividends, unlike cash dividends, dilute the value of each share like a stock split. Stock splits usually give each investor one or more shares per existing share they hold, whereas a stock dividend usually gives shareholders a fraction of a share per share they own.
When stocks split, the markets adjust immediately, changing the price of the stock so that investors have the same overall amount of value, while simply having more shares, each of which is less valuable. However, whether the same happens with stock dividends depends on how efficient the market is. If the market responds perfectly to changes in supply, it should adjust prices accordingly, making a stock dividend the same as a mini stock split, accruing no actual value to investors, unlike a cash dividend. However, if the market reacts differently to a smaller increase in the supply of shares than a larger one (i.e., not adjusting their price accordingly), then shareholders may be better off. It's worth watching to see if these stock dividends actually provide benefit to investors.
This contrasts to a cash dividend in which a company simply gives part of its profits to investors, who are the owners of a company. Tesla's earnings have continued to grow and in its most recent quarterly earnings release, the company beat revenue and adjusted earnings per share (EPS) estimates as they rose by 65% and 217% YOY, respectively.
The Bottom Line
Tesla is looking for shareholder approval for a "stock dividend," which, despite the name, is much more like a miniature stock split than it is like a conventional cash dividend. If it is approved, it remains to be seen whether doing will accrue any value to shareholders.