Question

Artesia Ltd is making good profits, even though growth is slowing down a bit. So far the company has not paid out cash to its shareholders, however the CFO wants to start paying dividend or start the repurchase program. What questions should the CFO address in order to decide on a possible pay out?

Answer 1

Qs. In case of Dividend Payout , whether it will be able to sustain it’s payout in the future?

A. The company’s earnings and its cash flow should be sufficient to sustain the payment of the dividend in the future also, else shareholders will be selling their shareholdings in masses if the dividend is reduced, suspended or eliminated. Whereas, Share repurchases usually offer the company management more flexibility than cash dividends by not establishing the expectation that a particular level of cash distribution will be maintained.

Qs. Which of the measures impacts the Company Valuation?

A. The Share Repurchase is positive for the company as the number of outstanding shares goes down and hence the earnings per share (EPS) increases. Higher EPS means being accorded higher valuations by investors, driving up the share price.

Qs. The objective of it investors – Capital Gains or Source of regular income ?

A. If Source of regular income, then dividend should be declared

B. If Capital Gains income, then Share Repurchase should be done

Qs. Tax Treatments Impact for Shareholders?

A. Countries where dividends are taxed at higher rates than capital gains, investors should prefer companies where earnings are reinvested in profitable growth opportunities or where it is used to repurchase shares such that they receive more of the return in the form of capital gains.

Q. What results in Wealth Building for Investors?

A. Share Repurchase may be better for building wealth over time for investors because of the beneficial impact on EPS because of a reduced share count, resulting in the ability to defer tax until the shares are sold. Buybacks enable gains to compound tax-free until they are crystallized, as opposed to dividend payments that are taxed annually.

Q. Which of the 2 measures has more visibility?

A. Information on dividend payouts is easily available on financial websites. Information on buybacks, however, is not as easy to find and generally requires extensive searching through corporate news releases.