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DIVIDENDS VS STOCK REPURCAHSE
THE STOCK PRICE EFFECT
FACILITATOR:
MR. IQBAL LALANI
GROUP MEMBERS:
MR. MOHAMMAD AHMED
MR. SHARUKH
MS. ANUM HYDER ALI
MS. KANWAL OWAIS
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DIVIDEND
Definition
A taxable payment declared by a company's board of
directors and given to its shareholders out of the
company's current or retained earnings.
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DIVIDEND - TYPES
Cash Dividends Pay dividends in the form of cash
Cash dividends can be in the form of regulardividends, special dividends, or liquidating dividends
Stock Dividends Pays dividends in the form of new stocks, rather than
cash
Stock Splits Split each share into multiple shares
Reverse Stock Splits Exactly opposite to stock splits
Multiple shares are combined into fewer shares
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DIVIDENDCASH DIVIDEND
Regular cash dividend
cash payments made directly to stockholders, usually
each quarter
Extra cash dividend indication that the extra amount may not be repeated
in the future
Special cash dividend
similar to extra dividend, but definitely wont berepeated
Liquidating dividend
some or all of the business has been sold
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DIVIDEND - ADVANTAGES
Sign of the company's stability.
Gives investors more confidence on the
company's future earnings.
Dividend Reinvestment Plan (DRIP) -shareholders can use their dividend payments to
purchase more shares .
Allow investors to profit from their investment
without having to sell their stocks.
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DIVIDEND - DISADVANTAGES
Discretion of the company management. Evenif the company makes a good profit, it is under
no obligation to pay a dividend.
less money left for the company to reinvest and
grow the business.
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SHARE REPURCHASE - DEFINITION
Buying own stock back from stockholders
objective is to increase the market value of the
shares by reducing their number available forpurchase
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SHARE REPURCHASE - REASONS
Alternative to distributing cash as dividends Dispose of one-time cash from asset sale
Execute large capital structure change
To support the share price
Flexibility in distributing cash to theshareholders.
To take advantage of tax structure
To reduce/restrict the number of outstanding
shares To avoid a possible takeover attempt by a large
shareholder
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SHARE REPURCHASE - METHODS
Dutch auction:
This works similar to the fixed price purchase, but
instead of specifying a fixed price, the company sets a
range of acceptable prices (minimum and maximum).
Repurchase by direct negotiation:
negotiate the price of shares with certain large
shareholders and buy the shares from them.
price will usually be higher than the current marketprice.
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SHARE REPURCHASE - METHODS
Buy in the open market: the shares will be purchased directly from the
market at the current market price.
offers a lot of flexibility as the company may
choose to buy shares at a convenient time. This method is also cost effective compared to
other methods.
Repurchase a fixed number of shares at a fixedprice:
fixed price offer to purchase a fixed number of shares ata fixed price.
This price will usually be above the prevailing marketprice
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SHARE REPURCHASE - ADVANTAGES
Stockholders can tender (sell) or not.
Helps avoid setting a high dividend that cannot
be maintained.
Repurchased stock can be used in takeovers orresold to raise cash as needed.
Income received is capital gains rather than
higher-taxed dividends (sometimes).
Stockholders may take as a positive signal--
management thinks stock is undervalued.
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SHARE REPURCHASE - DISADVANTAGES
Viewed as a negative signal (firm has poorinvestment opportunities).
IRS could impose penalties if repurchases were
primarily to avoid taxes on dividends. Selling stockholders may not be well informed,
Be treated unfairly.
Firm may have to bid up price to complete
purchase,
Pay too much for its own stock.
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DIVIDEND VS STOCK REPURCHASE
Dividend Cash dividends are dependable but repurchases are not
Selling shareholders may not be fully informed
Firm may pay too much for shares
Stock Repurchase Viewed as a positive signal
Stockholders have choice
Dividends are sticky in the short-run
Companies can divid target cash distribution intodividend and repurchase
Can produce large scale changes in capital structure
Repurchase shares for use with incentive stock options
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CONCLUSION
Repurchases have a tax advantage
Dividends are more dependable
Volatile dividends lower investor confidence
Repurchases useful to: Make capital structure shifts
Distribute cash from one-time events
Obtain shares for employee stock options
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