Question

Corporation Finance question

Discuss the similarities in dividends, share repurchases, and stock splits/stock dividends.

Answer 1

There are very few similarities between dividends and share repurchases. Similarly between stock splits and stock dividends.

a) Dividends and Share repurchases

Dividend is issued by the company from its profits or reserves regularly to the equity shareholders of the company . Share repurchases are decision taken by a company to buy back its own shares from the marketplace. A company might buy back its shares to boost the value of the stock and to improve the financial statements. Effectively Dividends and buyback are possible only when the company has enough profits/reserves in its balance sheet to fund the payment of dividends or purchase of shares from its investors.

b) Stock Splits and Stock Dividends.

Stock dividend is given by a company to its shareholders by using the amount of money that would be paid as a cash dividend otherwise. This cash is used to purchase additional equity shares for the shareholder. A stock split happens when a company issues two or more additional new shares for every existing share an investor holds. Both these are similar in nature only in terms of rewarding the shareholders with additional stocks. The purpose however is different. Stock split is used to bring the price of the stock in desire range by giving additional shares, whereas stock dividends is used for rewarding the shareholders with additional stock, by ensuring that the profits are not distributed to shareholders in cash, but is retained within company to fund growth.