Question

1. In the 2020 accounting year,
   1. The board of directors of some manufacturing and services companies decided to pay stock dividends instead of cash dividends.
   2. On the other hand, the board of directors of majority of companies within the ICT industry decided to pay special cash dividends.
   3. It was also observed that some the management of some companies had decided to repurchase shares while others were engaging in stock splits.
      1. What could be the reason for these decisions and choice of dividend payments by the boards of these companies?
      2. What do you think will be the effect of such decisions on the outstanding number of shares and the share prices of these companies?

Answer 1

Impact of dividend and stock repurchase decisions on the share price of the company :

a. Payment of dividends :

Reasoning : Stockholders required either stock appreciation or dividends as a cost of equity , hence it is common to pay dividends from surplus earnings.

Special cash dividends could be paid when there are super profits earned by a company.

Stock dividends - this is like a rights issue or bonus shares issue, where free shares or shares at a discounted cost is paid in lieu of cash dividends. This would be to retain cash for reinvestment in the company for future projects and the stockholders are happy since they have the additional shares alloted that may appreciate in the future.

Stock repurchase - when the company expects future prospects to be much higher , offering an exit route for shareholders that want to cash in , while retaining capital within a smaller group potentially.

b. Impact on share price

i. Due to cash dividends : Market price reduced by cash dividend per share.

ii. Bonus issue - If 1:1 issue then share price would halve.

iii. Repurchase of shares - purchase price of the shares will be the revised marekt price.