How to profit from share purchase plans

Share purchase plans (SPP) are a popular way for companies to raise capital. But they can also be a way for you to make a quick $1,000 or so with 10 minutes work.

Share purchase plans allow companies to issue up to $15,000 [or $30,000 from 2019] worth of new shares to each existing shareholder, usually at a discount to the current market price. The main benefit for the company is that it gets to raise capital cheaply and quickly, while shareholders get to avoid brokerage costs and buy at a discount.

So the next time you get a Share Purchase Plan Offer in the mail, what should you do?

First, you should ask yourself whether you want to buy more shares for the long term. If the offer price is significantly below the stock's intrinsic value (i.e. below our recommended Buy price on Share Advisor) and your holding is within our recommended maximum portfolio limit, it might make sense for you to increase your stake. In most cases the SPP price is below the current market price, but it's worth checking that you can't get a better deal buying on the open market.

But even if you don't want to increase your holding, there are still ways to make money.

If the offer is a renounceable rights issue, you can sell your 'right' to buy shares on the market (in some cases the company will do it for you).

Alternatively, for standard SPPs, you may be able to simultaneously buy and sell the stock to take advantage of the difference between the offer price and the market price.

Let's use an example. Hansen Technologies (ASX: HSN) recently announced an SPP for existing shareholders to subscribe for up to $5,000 worth of shares at an offer price of $2.17. The current market price is $2.53, 17% higher.

Strategy 1

If you already own the stock, you could sell 2,304 shares on the market today for proceeds of $5,829 (2,304 X $2.53). You could then use $5,000 of those proceeds to subscribe for 2,304 new shares through the share purchase plan at the lower price of $2.17. After the SPP completes next month, you will potentially have the same number of shares you started with, but an extra $829 in your pocket (2,304 X ($2.53 – $2.17)).

That word 'potentially', however, is a bit of a problem. If the offer is oversubscribed, the company has the option to issue less shares than you requested and give you a refund. You may only get allocated, say, 1,500 shares, which means you will end up with a smaller holding than you started with. The other issue is that Hansen has increased 66% since we first upgraded the stock, so this method would trigger capital gains tax.

Strategy 2

Alternatively, you could subscribe first, see what you get allocated on June 18, and then sell what you don't want on the market. This method guarantees that you won't be left owning fewer shares than you started with and also minimises the immediate tax consequences.

However, you're now exposed to the risk of an unfavourable share price movement. By the time you're ready to sell, Hansen's share price may have fallen below $2.53, reducing your profit. On the other hand, if it moves up, your profit will increase. In a worst-case scenario, the share price could fall below the SPP offer price, leading to a loss. Your final profit or loss will depend on Hansen's share price on the day of sale.

If you're happy to risk ending up with a smaller shareholding, but like the idea of locking in your profit, go with Strategy 1. If you prefer certainty with regard to the number of shares you own, but are willing to take your chances on profit/loss, go with Strategy 2.

Not all share purchase plans offer good value, and many won't have a sufficient difference between the offer price and market price to make participating worthwhile. But when everything lines up, share purchase plans can be money for jam.

To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor's Share Advisor now.

Note: The above information is general commentary only, not individual advice. Before making any investment decision you should consider your particular circumstance and seek professional tax advice if you're unsure of the potential tax consequences of these strategies.

Disclosure: The author owns shares in Hansen Technologies and will be participating in the SPP offer.