OM FINAL

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

Yi Zhou

Associate Professor Department of Finance

College of Business San Francisco State University

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

INTRODUCTION REGULAR CASH DIVIDENDS OTHER DIVIDENDS

INTRODUCTION

A dividend is a distribution to shareholders. A share repurchase is a distribution in the form of the company buying back its stock from shareholders.

Dividend initiations have a positive effect on share prices.

Dividend increases have a positive effect on share prices.

Share repurchases have a positive effect on share prices.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

INTRODUCTION REGULAR CASH DIVIDENDS OTHER DIVIDENDS

REGULAR CASH DIVIDENDS

A regular cash dividend is a cash dividend paid at regular intervals of time.

The regular intervals may be any frequency, but the most common are quarterly, semiannually, or annually.

Tendency of companies is to maintain or increase dividends. Companies prefer not to cut or reduce the dividend.

Often viewed as signals of management’s assessment of the company’s future, that is, whether the company can maintain the dividend in the future.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

INTRODUCTION REGULAR CASH DIVIDENDS OTHER DIVIDENDS

OTHER DIVIDENDS

An extra dividend (or special dividend) is a dividend that is either paid by a company that does not pay dividends regularly or paid by a company in addition to a regular dividend. Pay out in strong years without investors expecting an increased dividend. 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.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

DIVIDENDS: PAYMENT CHRONOLOGY

DIVIDENDS: PAYMENT

The ex-dividend date is set exactly two business days before the dividend record date.

On and after the ex-dividend date, a buyer of the stock will not receive the dividend

as the seller is entitled to it.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

DIVIDENDS: PAYMENT CHRONOLOGY

DIVIDEND PAYMENT CHRONOLOGY: AN EXAMPLE

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

DIVIDENDS: PAYMENT CHRONOLOGY

PRICE BEHAVIOR AROUND THE EX-DIVIDEND DATE FOR A $1 CASH DIVIDEND

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

SHARE REPURCHASES SHARE REPURCHASE VS. CASH DIVIDENDS

SHARE REPURCHASES

A share repurchase is the transaction in which the stock issuer buys back its shares from investors. –Also known as a share buyback.

Signal that the stock is undervalued.

Flexibility of distributing cash without using cash dividends.

Tax efficiency when the tax rate on capital gains is less than that of cash dividends.

Offset share increases from executive stock options.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

SHARE REPURCHASES SHARE REPURCHASE VS. CASH DIVIDENDS

SHARE REPURCHASE VS. CASH DIVIDENDS

If the tax consequences of dividends and capital gains are the same and the information content of cash dividends and stock repurchases is the same, then the effects of cash dividends and repurchases on shareholder value will be the same. Both cash dividends and stock repurchases:

Reduce assets by the amount of the dividend or repurchase.

Reduce equity by the amount of the dividend or repurchase.

Provide investors with the same cash flow.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

STOCK SPLITS REVERSE STOCK SPLITS

STOCK SPLITS

A stock split is a proportionate increase in the number of shares outstanding.

Number of new shares:Number of old shares

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.

Accounting: Memorandum entry, no change in accounts.

The announcement is generally viewed as a positive signal.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS

DIVIDENDS: CASH DISTRIBUTIONS DIVIDENDS: PAYMENT CHRONOLOGY

SHARE REPURCHASES STOCK SPLITS

STOCK SPLITS REVERSE STOCK SPLITS

REVERSE STOCK SPLITS

A reverse stock splits is the proportionate reduction in the number of shares.

A reverse stock split has the opposite effect of the traditional, or forward, stock split: –It reduces the number of shares, with the expectation of increasing the stock price.

A 1:2 reverse stock split results in half the number of shares outstanding after the split.

The goal may be to increase the share price to make it more attractive for institutional investors.

Reverse stock splits are most common for companies in financial distress.

YI ZHOU CHAPTER SIX: DIVIDENDS AND SHARE REPURCHASES: BASICS