Dividends and Share Repurchases: Forms, Payment, and Analysis

This report provides a comprehensive overview of dividends and share repurchases, crucial financial strategies for distributing value to shareholders. It begins by defining dividends, which can be cash or noncash distributions, including regular, extra, and liquidating dividends, as well as stock dividends and stock splits. The report then explores dividend reinvestment plans and the payment chronology, including declaration, ex-dividend, holder-of-record, and payment dates. The report also details share repurchases, or buybacks, including methods such as open market purchases, tender offers, and direct negotiations, and analyzes their impact on earnings per share and book value per share. The report concludes by comparing share repurchases and cash dividends, highlighting that they provide the same cash flow to investors. The report emphasizes that announcements of share repurchases and dividend initiations often signal positive market sentiment, and the key takeaway is that both dividends and share repurchases are essential tools for financial management, each with its own implications for shareholder value and company strategy.

Dividendsand Share
repurchases: Basics

1.Introduction
• A dividend isa prorata distribution to shareholders that
declared by the company’s board of directors and may
may not requireapproval by shareholders.
• A repurchase of stock is a distribution in the form of
company buying back its stock from shareholders.
• The board of directors determines the company’s payout
policy.
• Cash dividends and share repurchases are both method
distributing cash to shareholders.
• The effects on financial ratios and on shareholders’ investment
returns are differentbetween these two methods.
• These distributions mayprovide information about the company’s
future prospects.
• Issuing companies cannot deduct distributions to shareholders for
tax purposes.
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2.Dividends: Forms
Cash Distributions
Regular Cash Dividend
Extra Dividend
LiquidatingDividend
Noncash Distributions
Stock Dividend
Stock Split
Reverse Stock Split
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Regular cash dividends
• A regular cash dividend is a cash dividend paid
regular intervals of time
• The regularintervals may be anyfrequency, but the
most common are quarterly, semiannually, or annually.
• Tendency of companies is to maintain or increase
dividends
• Often viewedas signals of management’s assessment
the company’s future (that is, whether the company can
maintain the dividend in the future).
• Companies prefer not to cut or reduce the dividend.
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Dividend reinvestment plans
• A dividend reinvestment plan (DRP) is a programthat
to reinvest cash dividends automatically into the stock of the
company.
• The shares provided in exchange for the cash dividends may
in the open market by the issuer or maybe newly issued shar
• Advantages to the issuer:
• Encourage owners with smaller holdings to accumulate shares.
• “Raise” new equity capital without flotation costs.
• Advantages to the investor:
• Cost averaging of share purchases.
• Opportunity (in some cases) to buy shares at a discount from
• Disadvantages to the investor:
• Recordkeeping
• Dividends are taxed when “received,” whether reinvested or not.
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Extra or Special Dividends
• An extra dividend (or special dividend)is a dividend
that is either paid by a company that does not
dividends regularly or paid by a company in
addition to a regular dividend.
• Example: Whole Foods Marketannounced a $2 special
dividend in December 2012. This was in addition
$0.20 per quarter cash dividend.
• Motivation: Pay out in strong years without
investors expecting an increased dividend.
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Liquidating dividends
• A liquidating dividend is a distribution of cash to
shareholders when
• Going out of business, or
• Selling a portion of the business, or
• Paying a dividend when retained earnings are not
positive.
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Stock Dividends
• A stock dividend is the distribution of additional shares
stock to shareholders on a prorata basis.
• Alsoknown as a bonus issue of shares.
• Generally stated as a percentage of current shares
outstanding.
• A stock dividend does not changea shareholder’s
proportionate ownership, the shareholder does not receive
cash, and there are no tax consequences.
• Advantages for the issuer:
1. More shares outstanding and,therefore, potential for more
shareholders.
2. Lowers the stock’s price, which maymake it more attractive
investment.
3. No economic effect.
4. Does not affect financial ratios.
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Stock DividendsinPractice
• More prevalent in some countries.
• Some companies pay stock dividends on a regula
basis; some pay these occasionally.
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Stock Splits
A stock split is a proportionate increase in thenumb
shares outstanding.
• Stated in thefollowing form:
Number of new shares : Number of old shares
• So, 2:1 means that for each share held before the split,
shareholderholds twoshares after the split.
• Stock splits do not affect thedividend yield or the
dividend payout ratio.
• Accounting: Memorandum entry, no change in
accounts.
• The announcement is generally viewed as a positiv
signal.
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ReverseStock Splits
A reverse stock split is theproportionate reduction in
thenumber of shares.
• A reverse stock split has theopposite effect of the
traditional, or forward, stock split:
• It reducesthe numberof shares, with the expectation of
increasing the stock price.
• A 1:2 reverse stock split resultsin half thenumber
shares outstanding after thesplit.
• The goal may be to increase theshare price to mak
more attractive for institutional investors.
• Reverse stock splits aremost common for companies
financial distress.
• It is not permittedin some countries.
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3.Dividends: Payment Chronology
| | | |
Declaration
Date
Ex-Dividend
Date
Holder-of-Record
Date
Payment Date
Relationship Based on Trade Cycle
↑ ↑ ↑ ↑
Corporation
Issues Dividend
Declaration
Established by
Markets Based on
the Trade
Settlement Cycle
Established by
Corporation as
Date of Ownership
of Stock
Established by
Corporation as
Date the Dividend
Is Actually Paid
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