When Small is not Beautiful

There are many reasons you might own just a few shares in a company.
Perhaps a relative died and each of his or her shareholdings was split among several heirs. Or you bought a larger holding but the share price crumbled. Or you acquired a small holding as part of an employee share scheme, demutualisation or similar.

Then there’s what happened to one of my relatives. The company issued a dividend at about the time he sold his shares. He had opted to reinvest his dividends, so he ended up with just the dividend, made up of a few shares.

Such holdings are expensive for companies, which spend about $150 to $200 a year on each small shareholder, says Bruce Sheppard, former chairman of the NZ Shareholders Association. That eats into profits – at a cost to other shareholders.

“Further if they hold unmarketable parcels - I believe $500 value is about the level of investment that it is economic to hold before brokerage consumes the sale price to a significant level - then such shareholders are not only a deadweight but the investment has limited value to them,” says Sheppard.

And it’s not just a financial thing. People with tiny shareholdings must deal with miniscule dividends, consider what to do about rights issues and so on.

Many people just want to get rid of small holdings, but it’s not easy.
Minimum transaction costs range from about $35 to $105. And selling can be a bit of a hassle.

One solution, which I’ve seen in the US, is for a charity to ask people to donate their tiny shareholdings. With the help of an obliging broker, the charity aggregates the shares in each company into larger parcels and sells them to raise money.

Nobody has done this here, to my knowledge – so far. The idea is there for the taking.

Meantime, though, every now and then a company offers a deal. The latest is from Hellaby Holdings, which has said to its small shareholders - in the nicest possible way – “Shape up or ship out”.

The offer applies to New Zealanders with 2,000 or fewer Hellaby shares – worth up to roughly $4,300. They make up 60 per cent of the company’s shareholders, but own less than 6 per cent of the total share value.

These shareholders can buy an extra 1000 or 2000 shares, or they can sell their holdings - at the average market price during the offer.
The company will pay brokerage and registry costs.

Shareholders don’t have to do either. But for those with a “minimum holding” after June 14, “the company may arrange for these shares to be compulsorily sold in three months’ time.” And at that stage, shareholders would pay their own transaction costs.

That last bit sounds tough, but it’s probably fair enough. The company has to look after all its shareholders. And most people with small holdings in Hellaby will probably welcome the plan.

Other companies might want to follow suit. The latest annual reports show, for instance, that:

• 35 per cent of Fletcher Building’s shareholders own fewer than 1000
shares, or 0.89 per cent of the total share value.

• 35 per cent of Telecom’s shareholders own fewer than 1000 shares, or
0.39 per cent of the total share value.

I bet a fair chunk of those shareholders – and others similarly placed in other companies - would also like to get out at no cost. I know my relative would.