Stock Dividend Essay

Custom Student Mr. Teacher ENG 1001-04 11 October 2016

Stock Dividend

* Definition:
* A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation, which is paid in the form of shares of stock, as opposed to money, and increases the number of shares.
* A dividend paid as additional shares of stock rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold.
* Explanation:

When a corporation declares a stock dividend, it adds undivided profits, which cannot be used to pay dividends, to the capital invested in the corporation, to reflect the additional shares it is issuing. The stockholder’s increased number of shares represent the same proportion of the value of the company as the stockholder originally held (that is, the stockholder owns the same percentage of the corporation as prior to the declaration of the stock dividend); however, the cash value of an individual share is not reduced.

Shares issued as stock dividends are evidence that additional assets have been added to the capital. The value of the shares of a corporation often, but not always, increases following a stock dividend. A stock dividend is actually a part of corporation bookkeeping. A stock split is different from a stock dividend in that no adjustment is made to the capital; instead, the number of shares representing the capital increase. The cash value of an individual share, therefore, decreases in proportion to the size of the stock split.

* Advantages:
* The benefit of a stock dividend is choice. The shareholder can either keep the shares or hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. * A stock dividend is an increase in the amount of shares of a company with the new shares being given to shareholders. * The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value until the shares are sold. * Stock dividends are thought to be superior to cash dividends as long as they are not accompanied with a cash option. This is due to the choice that stock dividends offer compared to cash dividends.

* Disadvantages:

* The cost of issuing the new shares.
* Taxes and listing fees on the new shares.
* Other recording costs.

Stock splits
* Definition:
Division of already issued (outstanding) shares of a firm into a larger number of shares, to make them more affordable and thus improve their marketability while maintaining the current stockholders’ proportional ownership of the firm. The aggregate value of the shares remains the same as before the split, but the price (and dividend) per share declines with the split ratio.

* Example:

If a company splits its stock at 2:1 then, it will issue new shares for all the outstanding stocks. Therefore, 50% will reduce the individual share values. As a result, the stockholder may get twice number of stocks than they had earlier, but the total value will remain the same.

Stock splits can occur in different ratios, although the popular are 3:2, 3:1 and 2:1. There is also a chance of reverse split for a stock, but this does not happen frequently. The company may use the reverse stock split to push the small stockholders out.

Sometimes the stock prices go high; therefore, the investors think that a stock split may ease the situation. Stock splits do reduce the prices, which enable the investors, especially the beginners, to buy the shares at a low cost.

* Advantages:

* Sometimes low share prices may result in high liquidity, for low price stocks are often easier to sell. * Stock splits sometimes are treated as an indicator of a bullish market. * Stock splits pave the way for the small investors.

* Disadvantages:
* The companies expect more than the actual due to stock splits. So, if the expectations do not fulfill then the confidence of the investors may go down. Therefore, the share prices may further go down. * There is basically no relation between the performance of a company and stock split. So the companies will waste time if they wait for a stock split.

* Effects:

A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share’s portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements).

* Preconditions:

A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board’s proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.

* Dates for stock splits:

When dealing with transformations on stock splits, an investor needs to consider 2 dates:

Exdate and Record date:

* The EXDATE is the date at which the shares are trading at post-split prices.
* The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to.

Depending on the market (country) the dates will be set in different ways. There are two main principles:
* Exdate driven markets:
In Exdate driven markets, the Exdate will be after the record date.
* Record date driven markets:
In Record date driven markets, the record date will be after the Exdate.
Stock Repurchases
* Definition:
* The purchasing and retiring of stock by the issuing corporation.
* A repurchase is a partial liquidation since it decreases the number of shares outstanding.
* It may also be thought of as an alternative to cash dividends.

* Alternative Reasons for Stock Repurchases:
* To use the shares for another purpose
* To alter the firm’s capital structure
* To increase EPS and ROE resulting in a higher market price
* To reduce the chance of a hostile takeover

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  • University/College: University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 11 October 2016

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