Stock Dividends and Stock Split
The consequences of the stock dividend and stock split are the increased number of shares outstanding. However, since there is no added value (economically), then the share price per-sheet becomes smaller. The total effect of stock dividends and stock split does not exist, in other words, the total value of the company (stock) will be the same.
The conduct of the reasons Stock Dividends and Stock Splits
- Companies want to hold cash, but also want to pay dividends. Resolution is to pay stock dividends or stock splits.
- The company wants to acquire trading range that is considered ideal.
- Companies want to give signals to the market. Empirical discovery indicates that the price will react positively when the stock split was announced.
Reverse Split
Reverse stock split is the inverse of the spit (stock split). In a reverse split, a few shares of stock are united into one.
In the real world, a reverse split can be done for several reasons. First, a stock whose value is too small is often regarded as a stock that is not good or not ‘respectable’. Investors consider the company has poor prospects, and tend to rate low (underestimate). For that price the stock is increased to approach the ideal range. Secondly, if the stock price increases, transaction costs are expected to be smaller (the inverse of the empirical effects of stock split invention). Smaller transaction costs are expected to encourage the liquidity of shares.
Advantages and Disadvantages of Stock Repurchases
Alternative to the payment of cash dividends, the company may purchase the shares back. Purchase of shares outstanding can be done through the secondary market Stock Exchange. Shares purchased are included in treasury stock account. Theoretically, the value of the company before and after the purchase of shares will be the same again.
The Advantages of Stock Repurchases
- Buying back shares could save on taxes.
- Announcement of buy-back could be considered a positive signal by investors, because Stock repurchases often driven by the motivation of managers who assume that the undervalued stock price (lower than they should).
- Payment of dividends is usually done with a stable pattern.
- Shareholders have the option to Stock Repurchases. When need cash, they can sell the shares they acquire. Conversely, if do not need cash, or evading taxes, they can invest back into the company stock.
- In some specific situations, Stock Repurchases done selectively
The Disadvantages of Stock Repurchases
- The shareholders may have different preferences between cash dividends and Stock Repurchases (profits derived from capital gains). Cash dividends tend to be ‘unreliable’ because it gives a clear income (cash received), and relatively stable.
- The Company may pay the repurchase price is too high, to the detriment of current shareholders (who still holds the shares).
- Shareholders who sell their shares may not know exactly the implications and the Stock Repurchases program effects. If it turns out to feel aggrieved, they can sue the company.
Dividend and Stock Repurchases
Stock split
The action taken by a company to increase the number of shares outstanding.
Dividend Stocks
Dividends paid in the form of additional shares rather than cash.
Effect on Stock Price
- The stock price will rise
- Increase the company’s stock price signals due to the prospect of profits and dividends
- The share price will fall if not announced an increase in profits and dividends
Stock Repurchases
Alternative to the payment of cash dividends, the company may purchase the shares back. Purchase of shares outstanding can be done through the secondary market Stock Exchange. Shares purchased are included in treasury stock account. Theoretically, the value of the company before and after the purchase of shares will be the same again.