Corporate Finance Report: Dividend Payment and Share Buybacks

This report delves into the realm of corporate finance, specifically focusing on the critical aspects of dividend payments and share buybacks. It meticulously examines the arguments both for and against the determination of dividend payments, exploring the perspectives of shareholders and the finan...Read More

Running Head: CORPORATE FINANCE
CORPORATE FINANCE
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Table of Contents
Arguments for Determination of Payment of Dividends...........................................................2
Reference....................................................................................................................................4

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Arguments for Determination of Payment of Dividends
The investments is done by the shareholders in the companies for the appreciation of
capital as well as income. The company returns the profits to their shareholders either by cash
dividend or the share buybacks. The payout policy of the company is defined as the set of the
principles that guides cash dividends and shares value repurchased in any particular year. The
decisions of payout along with the financing decisions involves senior management and
board of directors, which are watched closely by the analysts and investors. The analyst is
having the concern regarding dividend and buy back of shares because dividend distribution
to the shareholders affects the returns of the investment as well as the financial ratios.
Moreover, the reasons that helps in driving the strategic decisions regarding dividend or share
buyback generally differs from one company to the other. These are based on various factors
such as current stock prices of the company, investment opportunities, applicable tax
structure of the company and so on (Arko et al. 2014).
The distribution of the dividend is done by the company from the profit after tax. The
companies that are having good balance of cash, pays the dividend in order to keep the
interest of the shareholders in their stock. It is one of the most common method for returning
the surplus of cash to their shareholders. However, there are two theory that are related to
declaration of dividend by the company (Floyd, Li and Skinner 2015). The first theory is the
dividend irrelevance theory and the second one is dividend relevant theory. The former
indicates the declaration as well as payment of the dividend that have little or no impacts on
the prices of stock. In case of this theory, the dividend does not adds value to the stock prices
of the company. Moreover, in the relevance theory, the choice of dividend policy affects the
firm’s value (Farre-Mensa, Michaely and Schmalz 2014).

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Generally, the companies, which consistently pays the dividends are considered to be
the most stable companies over the several past decades. However, the company who does
not pay the dividend regularly are not considered to be stable. The example of this can be
explained by the policy adopted by the company “RMH Holdings Limited”. The company
adopts stable dividend policy over the years. RMH has the policy of returning the net
dividends received in ordinary courses of the business to their shareholders. The objective of
the company is for providing the shareholders with the consistent annual flow of the dividend
(Rmh-online.co.za. (2019).
Further, buybacks of the shares is most tax-efficient way for returning the capital to
the shareholders because investors does not incurs any type of the additional tax on the
process of the additional tax. In case, if the company repurchases the shares then there is the
indication that company is having the positive prospects, which places the upward pressures
on the prices of the stock such as divestiture of the low-performing unit, releasing the new
product line, acquiring the another strategically company (Liu and Mehran 2016).
Hence, it can be said that the both buybacks as well as dividend payouts are the
indicative of the company, who is not having the opportunities of productive investment that
are left in market. The company can choose any one of them because both are them are
having efficient ways for rewarding their shareholders, which would best suits for the
shareholders and for itself (Farre-Mensa, Michaely and Schmalz 2014).

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Reference
C. Arko, A., Abor, J., KD Adjasi, C. and Amidu, M., 2014. What influence dividend
decisions of firms in Sub-Saharan African?. Journal of Accounting in Emerging
Economies, 4(1), pp.57-78.
Farre-Mensa, J., Michaely, R. and Schmalz, M., 2014. Payout policy. Annu. Rev. Financ.
Econ., 6(1), pp.75-134.
Floyd, E., Li, N. and Skinner, D.J., 2015. Payout policy through the financial crisis: The
growth of repurchases and the resilience of dividends. Journal of Financial
Economics, 118(2), pp.299-316.
Liu, N. and Mehran, J., 2016. Does dividend policy drive repurchases? An empirical
study. Managerial Finance, 42(1), pp.13-22.
Rmh-online.co.za. (2019). [online] Available at:
https://www.rmh-online.co.za/downloads/2018/RMH_Integrated_Rerport_2018.pdf
[Accessed 2 Jul. 2019].