Question

According to John Connors, former CFO of Microsoft, how does a company decide whether to increase its dividend, have a special dividend, or repurchase its stock to return capital to investors? Be DETAILED in your answer

Answer 1

The management of a company has three ways of distributing excess cash to it's investors:

• regular dividends
• special dividends
• and a aggressive buy- back program

The corporate managers elect that distribution method which increases the value of the firm. The method selected depends on the firm's expected future earnings, cash flows as well as the prior stock performance.

The repurchase program has a flexibility , which makes managers choose that method over the other methods of cash distribution. Stock repurchases offer firms another means of distributing their non-recurring cash flows. Another reason firm's want to go for buy back is when the value of the firm's shares are undervalued or the firm's experiencing poor stock performance, then they would want to use repurchase program to reduce the number of share available  in the market and increase the stock price.

When the firm's expect  that the earnings are expected to increase in the future , they would more likely go for regular dividends than the special dividends .

The firms declare regular dividends after a continous increase sin cash flows, but after a one time increase in non- operating cash flows, firm;'s are more likely to declare a repurchase program or special dividends.