MOS - Chp 11 (Dividends, Stock, Repurchases and Payout Policy)

Types of Dividends

1. Regular Cash Dividend

   1. cash dividend paid on a quarterly basis

2. Extra Dividend

   1. often paid at the same time as regular cash dividiends

   2. ensures that a minimum portion of earnings is distributed to shareholders each year

3. Special Dividend

   1. one-time payment to shareholder in large amounts of cash

4. Liquidating Dividend

   1. Paid to stockholders when a firm is liquidated (last priority)

      1. money from the sale of asset to creditors, stockholders etc.

Dividend Payment Process

• Board Vote — The firm’s board votes to issue a dividend, specifying the amount and key dates of the issue.

• Public Announcement Date — The firm releases the information regarding the dividend payment. Often the stock price will move on the dividend announcement date because investors use this dividend information as a signal regarding the future prospects of the firm.

• Declaration Date - announces the value that stockholders received per share (subject to change), dividend payment dates

• Ex-Dividend Date - set by stock exchange, shares traded without the right to receive the dividend

• Record Date - an investor must be a stockholder or record to receive dividend, typically 2 days after ex-dividend date

Stock Repurchases

• when a company repurchases shares (which reduces the number of shares held by investors)

• taxed on the profit of the total value

• added to liability side of balance sheet

How are Stock Repurchases Purchased?

1. Open Market Repurchases

   1. limited purchasing power due to government limited number of shares purchased daily

2. Tender Offer

   1. Open offer by a company to purchase shares

      1. Fixed-Price: the company offers a fixed price to
         investors who agree to sell their shares

      2. Dutch Auction: the company seeks bids for the number of shares investors would sell at a series of prices. The company may then choose the price in the series that will result in the desired number of shares being
         repurchased.

3. Targeted Stock Repurchases

   1. used to buy blocks of shares from large stockholders

Dividends Benefits and Costs

Benefits of Dividends	Costs of Dividends
Attracts investors that prefer stocks paying dividends   positive signal to the market about company’s sustainability More flexible in payment rather than selling shares (which is limited)  Provide managers with incentive to manage company efficiently manage capital structure	Dividends are paid out regardless, and TAXABLE    Brokerage fees   Dividend Reinvestment Programs (DRIPS) exist to invest dividends in company stock, but you still need to pay tax

Dividend vs Stock Repurchase

	Dividend	Stock Repurchase
Who is impacted?	All shareholders receive a dividend when declared	Shareholders if they want to sell shares
Shares Outstanding	No change in the number of shares outstanding	Number of shares that exist decreases when a company repurchases shares
Tax Treatment	Treated as dividend income   Full amount of dividend added to income   Dividend tax credit available	Treated as a capital gain   Taxed on the profit from sale
Balance Sheet	Decreases assets and retained earnings	Added to liability side

*stock repurchase a slightly unethical given managers have inside knowledge and can be used to their advantage

Stock Dividends vs Stock Splits

Stock Dividends	Stock Split
Shareholders receive shares	Division of each share into more shares   Makes shares look more attractive to investors   Can lead to high stock price
Usually indicated as a %	Does not provide cash

Factors that managers consider WHEN setting dividend payouts

Excess Value in the form of…

• expected profitability

• future investment requirements

• financial reserves and flexibility

• firm’s ability to raise capital quickly