 Name : Nawab Ali

 Programe: MBA (3.5)

 Roll No: 36

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Our Presentation Topic Is Dividend & Share
Repuchases..

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Dividends and Repurchases

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 What is Dividend?

A dividend is the distribution of reward from a portion of

company's earnings and is paid to a class of its shareholders.
Dividends are decided and managed by the company’s Board of
Directors, though they must be approved by the shareholders
through their voting Rights. Dividends can be issued as cash
payments, as shares of stock, or other property, though cash
dividends are the most common.

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 How is Dividend Works>?
A dividend’s value is determined on a per share
basis and is to be paid equally to all
shareholders of the same class (common,
preferred, etc.). The payment must be
approved by the by the board of directors.

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 The distribution policy defines:
 The level of cash distributions to shareholders
 The form of the distribution (dividend vs. stock
repurchase)
 The stability of the distribution

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 It’s decision to pay out earnings vs. retaining &
re-investing. Includes these elements:
 High of low payout?
 Stable or irregular dividends?
 How frequent?
 Is policy announced?

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 The percent of total payouts a a percentage of net
income has been stable at around 26%-28%.
 Dividend payout rates have fallen, stock repurchases have
increased.
 Repurchases now total more dollars in distributions than
dividends.
 A smaller percentage of companies now pay
dividends. When young companies first begin making
distributions, it is usually in the form of repurchases.
 Dividend payouts have become more concentrated in a
smaller number of large, mature firms.

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 There are three dividend theories:
 Dividends are irrelevant: Investors don’t care about
payout.
 Dividend preference, or bird-in-the-hand: Investors
prefer a high payout.
 Tax effect: Investors prefer a low payout.

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 Repurchases: Buying own stock back from
stockholders.
 Reasons for repurchases:
 As an alternative to distributing cash as dividends.
 To dispose of one-time cash from an asset sale.
 To make a large capital structure change.
 To use when employees exercise stock options.

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 Firm announces intent to repurchase stock.
 Three ways to purchase:
 Have broker/trustee purchase on open market over
period of time.
 Make a tender offer to shareholders.
 Make a block (targeted) repurchase.

 Firm doesn’t have to complete its announced

intent to repurchase.

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 The announcement of an intended repurchase might
send a signal that affects stock price, and the previous
events that led to cash available for a distribution affect
stock price, but the actual repurchase has no impact on
stock price because:
 If investors thought that the repurchase would increase the
stock price, they would all purchase stock the day before,
which would drive up its price.
 If investors thought that the repurchase would decrease the
stock price, they would all sell short the stock the day before,
which would drive down the stock price.

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 Stockholders can choose to sell or not.
 Helps avoid setting a high dividend that
cannot be maintained.
 Income received is capital gains rather than
higher-taxed dividends.
 Stockholders may take as a positive signal--
management thinks stock is undervalued.

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 May be viewed as a negative signal (firm has
poor investment opportunities).
 IRS could impose penalties if repurchases were
primarily to avoid taxes on dividends.

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 Dollars to be reinvested are turned over to
trustee, who buys shares on the open market.
 Brokerage costs are reduced by volume
purchases.
 Convenient, easy way to invest, thus useful for
investors.

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 Firm issues new stock to DRIP enrollees, keeps
money and uses it to buy assets.
 No fees are charged, plus sells stock at discount
of 5% from market price, which is about equal
to flotation costs of underwritten stock
offering.

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 1. Constraints on Dividend Payments
 Bond Indentures
 Preferred stock restrictions
 Impairment of capital rule
 Availability of Cash
 Penalty tax on improperly accumulated earnings.

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 2.Investment Opportunities
 Number of profitable investment opportunities
 Possibility of accelerating or delaying projects

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 3. Alternative sources of Capital
 Cost of selling new stock
 Capital structure flexibility
 Control

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 4. Effects of Dividend Policy on Cost of Equity
(Ks)
 Stockholders desire for current versus future income
 Perceived risks of dividends vs. capital gains
 Tax advantage of cap gains over dividends
 Information content of dividends

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