My stockbroker has been asking me a lot lately if I’d like to buy additional discounted shares in some of the stocks I already own, such as Rolls-Royce Holdings (LSE: RR) – this is what is known as a “rights issue”, which is a way for the company to raise more much-needed money.
Are rights issues right for me?
I’ve been burned before, so I’m already somewhat reluctant to take up my rights for additional discounted shares. You see, during the financial crisis that sent markets south from 2007 to 2009, I took up my rights to buy additional discounted shares in some supposedly sound companies (including big banks) that subsequently went bust. Therefore, what seemed like a series of no-brainers – cheap shares! – turned out to be money traps.
Now that I’m older and hopefully wiser, I know that shares in companies such as Rolls Royce shouldn’t be bought simply because they’re being offered at a lower price before.
Is the Rolls-Royce rights issue right for me?
So, now let’s look specifically at the Rolls-Royce rights issue that was announced on 28th October and requires me to respond by 9th November.
The share price gapped-down on news that the rights issue had been approved by the majority of existing shareholders. This price plummet was due to the new “diluting” shares being issued, and it means my currently held shares are already worth at least 60% less than they were before the announcement. Latest price: about 84.5p per share.
However, I can now buy some of the newly issued shares – ten of them for every three shares I already own – at a bargain basement price of 32p-per-share.
Running the numbers
Does all this make your head hurt? Mine too. I swear that these rights issues are designed to dumbfound us ordinary investors. Heck, I can barely do the maths to calculate what my new average purchase price would be, let alone work out whether 32p per share is actually a fair price to pay for more Rolls-Royce shares.
I could dig deep into the company fundamentals and pundits’ new earnings predictions to try to make some sense of the opportunity on offer, but in this case I think it would be futile. Nobody knows what will happen next. With the second wave of the coronavirus making the future even more uncertain for aerospace companies that have sold hardly any new commercial airliners recently, I’ve decided to sit it out and let my Rolls-Royce rights issue entitlement lapse until the smoke clears. There’s no smoke without fire, and – as I said at the outset – I’ve been burned before.
A final thought
Whenever I make an initial exploratory investment in my very diversified portfolio, it’s an amount of money that I don’t mind losing entirely if the worst happens. I hope for the best but will accept the worst, and I won’t lose my shirt if I never bet the farm on any single stock.
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Tony Loton owns shares in Rolls-Royce Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.