How to Calculate the Capitalization of Retained Earnings for a Small Stock Dividend

by Bryan Keythman

In a stock dividend, a company issues new shares of stock to its stockholders. A small stock dividend occurs when the number of new shares issued is equivalent to less than 20 to 25 percent of the total shares outstanding. When a company issues a stock dividend, it must capitalize retained earnings, which transfers a portion of its retained earnings account to its paid-in capital accounts, all of which are part of the stockholders’ equity section of the balance sheet. The amount of total stockholders’ equity remains the same after the transfer, which results in little effect on a stockholders’ investment.

Find the number of a company’s shares outstanding at the beginning of the year and the size and declaration date of its stock dividend in its 10-K annual report. You can get a company’s 10-K annual report from the investor relations section of its website or from the U.S. Securities and Exchange Commission’s EDGAR online database. For example, assume a company had 1 million shares outstanding at the beginning of the year and declared a 10 percent stock dividend on June 1.

Find the company’s balance sheet in its annual report. Find the par value per share of common stock in the “Stockholders’ Equity” section of the balance sheet. In this example, assume the company’s par value per share is $1.

Visit any financial website that provides stock quotes. Find the company’s historical stock price on the declaration date of the stock dividend under “historical prices” in the company’s stock quote section. For example, assume the company’s stock price was $20 per share on June 1.

Multiply the percentage size of the stock dividend by the number of shares outstanding at the beginning of the year to calculate the number of shares issued in the dividend. In the example, multiply 10 percent, or 0.1, by 1 million to get 100,000 shares issued.

Multiply the number of shares issued by the stock price per share to calculate the total amount of the capitalization of retained earnings. In this example, multiply 100,000 shares by $20 per share to get $2 million, which means the company reduced retained earnings by $2 million.

Multiply the number of shares issued by the par value per share to calculate the portion of the total capitalization by which the company increased its common stock account. In the example, multiply 100,000 shares issued by $1 to get $100,000.

Subtract the portion by which the company increased its common stock account from the amount of total capitalization to calculate the portion by which it increased its “paid-in capital in excess of par” account. Continuing the example, subtract $100,000 from $2 million to get $1.9 million, which is the portion of the total capitalization the company added to its “paid-in capital in excess of par” account.

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