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1. INTRODUCTION
A dividend is a pro rata distribution to shareholders that is declared by the companys board of directors and may or may not require approval by shareholders. A repurchase of stock is a distribution in the form of the company buying back its stock from shareholders. The board of directors determines the companys payout policy. Cash dividends and share repurchases are both methods of distributing cash to shareholders. - The effects on financial ratios and on shareholders investment returns are different between these two methods. - These distributions may provide information about the companys future prospects. - Issuing companies cannot deduct distributions to shareholders for tax purposes.
Noncash Distributions
Stock Dividend Stock Split Reverse Stock Split
The shares provided in exchange for the cash dividends may be acquired in the open market by the issuer or may be newly issued shares.
Advantages to the issuer: - Encourage owners with smaller holdings to accumulate shares.
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.
STOCK DIVIDENDS
A stock dividend is the distribution of additional shares of stock to shareholders on a pro rata basis.
STOCK SPLITS
A stock split is a proportionate increase in the number of shares outstanding. Stated in the following form: Number of new shares : Number of old shares So, 2:1 means that for each share held before the split, the shareholder holds two shares after the split. Stock splits do not affect the dividend yield or the dividend payout ratio.
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Declaration Date
Ex-Dividend Date
Holder-ofRecord Date
Payment Date
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4. SHARE REPURCHASES
A share repurchase is the transaction in which the stock issuer buys back its shares from investors.
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5. CONCLUDING REMARKS
Share repurchases have a positive effect on share prices. Dividend initiations have a positive effect on share prices. Dividend increases have a positive effect on share prices.
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6. SUMMARY
Dividends can take the form of regular or irregular cash payments, stock dividends, or stock splits.
Regular cash dividends represent a commitment to pay cash to stockholders on a quarterly, semiannual, or annual basis.
The key dates for cash dividends, stock dividends, and stock splits are the declaration date, the ex-date, the shareholder-of-record date, and the payment date. Share repurchases, or buybacks, most often occur in the open market. Alternatively, tender offers occur at a fixed price or at a price range through a Dutch auction. Share repurchases made with excess cash have the potential to increase earnings per share, whereas share repurchases made with borrowed funds can increase, decrease, or not affect earnings per share, depending on the after-tax borrowing rate.
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SUMMARY (CONTINUED)
A share repurchase is equivalent to the payment of a cash dividend of equal amount in its effect on shareholders wealth, all other things being equal.
Announcement of a share repurchase is sometimes accompanied by positive excess returns in the market when the market price is viewed as reflecting managements view that the stock is undervalued.
Initiation of regular cash dividends can also have a positive impact on share value.
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