dividends vs stock repurcahse – the stock price

7/28/2019 DIVIDENDS VS STOCK REPURCAHSE THE STOCK PRICE

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DIVIDENDS VS STOCK REPURCAHSE

THE STOCK PRICE EFFECT

FACILITATOR:

MR. IQBAL LALANI

GROUP MEMBERS:

MR. MOHAMMAD AHMED

MR. SHARUKH

MS. ANUM HYDER ALI

MS. KANWAL OWAIS


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DIVIDEND

Definition

A taxable payment declared by a company's board of

directors and given to its shareholders out of the

company's current or retained earnings.


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DIVIDEND - TYPES

Cash Dividends Pay dividends in the form of cash

Cash dividends can be in the form of regulardividends, special dividends, or liquidating dividends

Stock Dividends Pays dividends in the form of new stocks, rather than

cash

Stock Splits Split each share into multiple shares

Reverse Stock Splits Exactly opposite to stock splits

Multiple shares are combined into fewer shares


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DIVIDENDCASH DIVIDEND

Regular cash dividend

cash payments made directly to stockholders, usually

each quarter

Extra cash dividend indication that the extra amount may not be repeated

in the future

Special cash dividend

similar to extra dividend, but definitely wont berepeated

Liquidating dividend

some or all of the business has been sold


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DIVIDEND - ADVANTAGES

Sign of the company's stability.

Gives investors more confidence on the

company's future earnings.

Dividend Reinvestment Plan (DRIP) -shareholders can use their dividend payments to

purchase more shares .

Allow investors to profit from their investment

without having to sell their stocks.


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DIVIDEND - DISADVANTAGES

Discretion of the company management. Evenif the company makes a good profit, it is under

no obligation to pay a dividend.

less money left for the company to reinvest and

grow the business.


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SHARE REPURCHASE - DEFINITION

Buying own stock back from stockholders

objective is to increase the market value of the

shares by reducing their number available forpurchase


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SHARE REPURCHASE - REASONS

Alternative to distributing cash as dividends Dispose of one-time cash from asset sale

Execute large capital structure change

To support the share price

Flexibility in distributing cash to theshareholders.

To take advantage of tax structure

To reduce/restrict the number of outstanding

shares To avoid a possible takeover attempt by a large

shareholder


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SHARE REPURCHASE - METHODS

Dutch auction:

This works similar to the fixed price purchase, but

instead of specifying a fixed price, the company sets a

range of acceptable prices (minimum and maximum).

Repurchase by direct negotiation:

negotiate the price of shares with certain large

shareholders and buy the shares from them.

price will usually be higher than the current marketprice.


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SHARE REPURCHASE - METHODS

Buy in the open market: the shares will be purchased directly from the

market at the current market price.

offers a lot of flexibility as the company may

choose to buy shares at a convenient time. This method is also cost effective compared to

other methods.

Repurchase a fixed number of shares at a fixedprice:

fixed price offer to purchase a fixed number of shares ata fixed price.

This price will usually be above the prevailing marketprice


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SHARE REPURCHASE - ADVANTAGES

Stockholders can tender (sell) or not.

Helps avoid setting a high dividend that cannot

be maintained.

Repurchased stock can be used in takeovers orresold to raise cash as needed.

Income received is capital gains rather than

higher-taxed dividends (sometimes).

Stockholders may take as a positive signal--

management thinks stock is undervalued.


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SHARE REPURCHASE - DISADVANTAGES

Viewed as a negative signal (firm has poorinvestment opportunities).

IRS could impose penalties if repurchases were

primarily to avoid taxes on dividends. Selling stockholders may not be well informed,

Be treated unfairly.

Firm may have to bid up price to complete

purchase,

Pay too much for its own stock.


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DIVIDEND VS STOCK REPURCHASE

Dividend Cash dividends are dependable but repurchases are not

Selling shareholders may not be fully informed

Firm may pay too much for shares

Stock Repurchase Viewed as a positive signal

Stockholders have choice

Dividends are sticky in the short-run

Companies can divid target cash distribution intodividend and repurchase

Can produce large scale changes in capital structure

Repurchase shares for use with incentive stock options


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CONCLUSION

Repurchases have a tax advantage

Dividends are more dependable

Volatile dividends lower investor confidence

Repurchases useful to: Make capital structure shifts

Distribute cash from one-time events

Obtain shares for employee stock options


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THANK YOU

dividends vs stock repurcahse – the stock price

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