...stocks repurchases the best payout alternative method? Willie Reddic Table of Contents 1.0 Introduction.……............................................................................................................3 2.0 Beginning Literature of Dividends and the Movement towards Repurchases .......3 3.0 Methods of Repurchases and Key Definition ...............................................................4 4.0 The Positives and Negatives on Methods of Repurchases ……....................................5 5.0 Summary and Conclusion ...........................................................................................10 6.0 References.....................................................................................................................11 1.0 Introduction “A share repurchase distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding.” (Wikipedia Foundation, Inc.) The intent of this paper is to review stock repurchases as the preferred method of alternative payout for shareholders. There are many reasons why firms choose this option. Past literature shows substantial evidence of reasons that range from capital structure adjustments to takeover defense (Bagwell, 1991). However, in my opinion the strongest reason is because stock repurchases can be used as another method of paying out shareholders in the form of a dividend. In recent...
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... February 2006 Corporate Dividend Policy Authors Henri Servaes Professor of Finance London Business School The Theory and Practice of Corporate Dividend and Share Repurchase Policy Peter Tufano Sylvan C. Coleman Professor of Financial Management Harvard Business School Editors James Ballingall Capital Structure and Risk Management Advisory Deutsche Bank +44 20 7547 6738 james.ballingall@db.com Adrian Crockett Head of Capital Structure and Risk Management Advisory, Europe & Asia Deutsche Bank +44 20 7547 2779 adrian.crockett@db.com Roger Heine Global Head of Liability Strategies Group Deutsche Bank +1 212 250 7074 roger.heine@db.com The Theory and Practice of Corporate Dividend and Share Repurchase Policy February 2006 Executive Summary This paper discusses the theory and practice of corporate dividend and share repurchase policy drawing on the results of a recent survey. Theoretical Considerations The table below lists the factors that are important in the choice between dividends and repurchases as a payout mechanism Factor Taxes Conveying information Management bonding Shareholder rights Investor preferences Attracting monitors Managing EPS Changing capital structure Residual policy Dominating Payout Form Depends Depends on time horizon Dividends Depends on other factors Depends on preferences Depends on other factors Repurchases Depends on other factors Depends on other factors Survey Results Dividends continue to be the most important...
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...Share Repurchase: Is it good or bad? Financial Strategy (BMBA715.2) Date: 27th March 2013 Tutor: Mark Pilkington Author: Nandkumar Mahajan (136866461) Word Count: 3069 Table of Contents Executive Summary ............................................................................................................................. 3 Company capital structure & Shareholder value ...................................................................... 4 Why companies really repurchase shares? ................................................................................ 6 Is there any real value in share repurchase? ............................................................................. 7 Hewlett-‐Packard (HPQ) ................................................................................................................................ 7 Next Plc. (NXT) ........................................................................................................................................... 10 Conclusion ..................................................................................................................
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...Open market repurchases and employee options Kathleen M. Kahle* Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA (Received 20 September 2000; accepted 6 June 2001) Abstract This paper examines how stock options affect the decision to repurchase shares. Firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of nonmanagerial options. JEL Classification:G30, G32 Key Words: share repurchase, executive stock options, employee stock options I thank Ken Lehn, Frederik Schlingemann, Kuldeep Shastri, René Stulz, Shawn Thomas, Cynthia von Skansen, Ralph Walkling, and an anonymous referee for helpful comments and suggestions. Tomas Jandik and Gang Hu provided excellent research assistance. * Tel.: 412 648 1519, Fax: 412 648 1693 E-mail address: kkahle@katz.pitt.edu 0304-405X/00$-see front matter © 2002 Elsevier Science S.A. All rights reserved 1. Introduction Early studies of open market stock repurchases document...
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... Estalene Carrington: 20050270 ------------------------------------------------- Assignment 1 ------------------------------------------------- lECTURER – STACEY ESTWICK Due date – 27 February 2012 ------------------------------------------------- ------------------------------------------------- Question 1 What is Linear’s current payout policy? Linear Technology went public in 1986 and is the seventh largest company by market capitalization under the SOX Act. It split its stock four times since its Initial Public Offering (IPO). Linear’s first dividend was declared on October 13th, 1992. Coghlan (Linear’s CFO) explained that the company had a positive cash flow since their IPO. He further posits that paying a dividend would signal to investors that buying shares in Linear was not as risky as buying shares in most other technology companies. Furthermore, offering a dividend would give Linear access to a new set of investors with varying...
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...As an investor yourself, would you rather a firm pays you a lot of dividends or would you rather simply earn capital gains? In other words, would you rather your return for investing in a firm’s stock come from quarterly cash dividends or stock price appreciation? Why? If I had to choose dividends or stock price appreciation, I would prefer a stock repurchase. When a company buys back shares, investor`s ownership percentage rises without any tax consequences. Unlike a cash dividend, a stock repurchase gives the decision to the investor. An investor can choose to tender his shares for repurchase, accept the payment and pay the taxes. With a cash dividend, a stockholder has no choice but to accept the dividend and pay the taxes. In addition, stock repurchases offer companies more flexibility than dividends. Once a dividend is put in place, it might have a big negative if the dividends are decreased or ceased in the future. In contrast, if a company stops repurchasing shares, it is hardly noted. Moreover, companies usually initiate a share repurchase when the stock is estimated to be undervalued. A company`s management team knows its business and relative stock price very well, and it is unlikely that it would purchase its stock at a high price. 2. Given historically dividends result in higher taxes for individual investors than capital gains, why have firms still paid dividends? A company that pays dividends forms a positive image and sends good signals to the shareholders...
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...Payout Policy Analysis Payout policy, or the means by which cash is returned to shareholders via cash dividends or share repurchases, is of critical concern for financial managers because of disagreements between management, investors, and financial academia on optimal policy. Payout policy decisions are often based upon key factors such as industry trends and behavior, decisions of benchmark competitors, and the predictability of future cash flows and sustainability. Linear Technology uses regular quarterly dividends, and share repurchases as opposed to special dividends to maintain their target payout ratio. Finally, Linear appears to smooth dividends with dividend growth as opposed to a traditional residual policy. As proposed by Modigliani and Miller, choices in dividend policy do not have an effect on firm value under the assumptions of fixed capital investment and debt policy. The model is extended to further prove the irrelevance of stock repurchases when adhering to the cash flow constraint. Finally, the concept of homemade dividends whereby an investor can duplicate a desired payout policy by selling or reinvesting shares enforces irrelevance from an investor. Theoretically, the irrelevance of payout policy on firm value should downplay the controversy of such decisions. Thus policy controversy and decisions are often the result of agency problems, signaling, and clientele effects. Applicability of these theories to Linear is discussed in the next section. ...
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...shareholders to receive cash without being paid dividends. A firm can buy back some of its shares with the advantage being that most investors are not taxed as heavily on shares sold as they are on dividends received.(The Dividend Puzzle) Any increase in the dividend that is not financed by external financing will hurt creditors. Any money that is payed out in dividends is lost to the creditors if trouble develops. Repurchases are an efficient way to reduce agency costs of free cash flow, like dividends, but repurchases increase the debt-equity ratio with possible debt overhang costs. Shareholders would benefit from share repurchases as they would pay lower tax on the capital gain then they would on a dividend income payment. They could potentially find themselves to be better off with a repurchase. Shareholders would view a repurchase as positive as if the market reacts positively to announcements of dividend increases then it should also do for repurchases. Share prices traditionally rise by 3 % when firms announce open-market share repurchases. Buybacks can also signal to shareholders that the firm is underpriced; however Gainesboro could also be buying back shares from particular shareholders in order to distribute cash to insiders before revealing bad news to the market. So Gainesboro must be careful in the way it undertakes the buyback if it wants to portray positive news to shareholders. Share repurchase may also have an effect on ownership structure of...
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...Blaine Kitchenware Inc. Case Analysis: Muhamad Fahad Sohail Table of Contents Blaine Kitchenware capital structure and payout policy 2 Advantages and Disadvantages of share repurchase move 2 New proposal by CEO TO repurchase stocks from the market and its analysis 3 Recommendation to the CEO as a family member and as an independent consultant 3 How does the proposal differ from paying a special dividend of $4.39 share instead? 4 Blaine Kitchenware capital structure and payout policy Blaine Kitchenware Inc.’s current capital structure is not efficient. The incentive for any public company and Board of Directors should be the increase the value of firm through projects, increased earnings per share value, and the lowering of costs. One way many firm’s effectively increase the value of the firm is to minimize the weighted average cost of capital. The weighted average cost of capital is the costs of a firm in the form of debt and equity. Since Blaine Kitchenware is a public company and issues shares, they have an established capital structure model. By taking on no debt, the value of the firm is unlevered and the firm does not gain the advantage of the interest tax shield. It is because Blaine Kitchenware Inc. has chosen to finance projects by the selling of shares and has not made use of debt issuance that the firm’s value is not fully maximized and the weighted average cost of capital is not minimized. If Blaine Kitchenware Inc. took on debt, the value of the...
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...questions will address what decision is the optimal and why it is beneficial for BKI. Ans. 1) The main dilemma in the case is whether Blaine Kitchenware’s should choose to repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they must consider whether to partially repurchase the market float or go for a complete buyback where Blaine’s family would become the owner of all the remaining shares. They also have to consider of the effect of the repurchase on various factors like the risks involved in raising a debt especially when they are large, very conservative and debt free. They should also consider things such their acquisition plans, their earnings per share and their dividend per share, ownership structure, capital structure and of course the reputation of the company in the market after the buyback. With this in mind we can consider a few situations and then decide what Blaine should do, keeping in mind the perspective of both the existing shareholders' as well as Blaine's family’s. Since no debt is being raised, if all the cash & cash securities plus the market securities are used for the buy-back, his family may like this option. Their management will have increased stakes, this will reduce their chance of being acquired and this will provide more dividends to their remaining shareholders. There is a big question facing Blaine and that is why would their existing shareholders want to sell their equity back to the company? Another...
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... Introduction: The decision by William Wrigley Jr. Company to do a $3 billion leveraged recapitalization through a dividend or share repurchase could create significant new value for the company. The purpose of this report is to analyze the impact this will have on the firm’s value, comment on the appropriateness of Wrigley’s debt level in the event of the proposed bond issue and make recommendations as to whether or not the firm should in fact follow through with the issue. The items of interest that will be analyzed include: the impact on share price, cost of capital, earnings per share, agency cost of debt, voting control, signaling & clientele effect and debt coverage & financial flexibility. Analysis Impact on stock price and WACC The leverage does not affect firm value and as such Wrigley should not prefer any particular capital structure. As payments made towards debt are tax deductable the issuing of debt will increase firm value by providing a tax shield. As the role of management is to maximize firm value, the amount of debt in Wrigley should be maximized. Management should also consider a safe level of debt though to prevent risks of liquidity and operating restrictions. To recapitalize with $3 billion of debt the firm will benefit from a tax shield of $1.2 billion. This will result in the market share price increasing to $61.53/share. Using Hamada’s equation, leveraging the firm would result in an increasing beta from 0.75 to 0.86. By issuing debt, Wrigley’s...
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...Chapter 13 Dividend Policy Solutions to Problems P13-1. LG 1: Dividend Payment Procedures Basic (a) Retained earnings (Dr.) Dividends payable (Cr.) (b) Ex dividend date is Thursday, July 6. (c) Cash $170,000 Dividends payable Retained earnings $0 $2,170,000 Debit $330,000 $330,000 Credit (d) The dividend payment will result in a decrease in total assets equal to the amount of the payment. (e) Notwithstanding general market fluctuations, the stock price would be expected to drop by the amount of the declared dividend on the ex dividend date. P13-2. LG 1: Dividend Payment Intermediate (a) (b) (c) (d) Friday, May 7 Monday, May 10 The price of the stock should drop by the amount of the dividend ($0.80). She would be better off buying the stock at $35 and taking the dividend. Her $0.80 dividend would be taxed as the maximum rate of 15 percent and her $4 short-term capital gain would be taxed at you ordinary marginal tax rate, which is probably higher than the 15 percent. If she bought the stock post dividend for $34.20 she would pay her marginal ordinary tax rate on the full $4.80 of short-term capital gains. P13-3. LG 2: Residual Dividend Policy Intermediate (a) Residual dividend policy means that the firm will consider its investment opportunities first. If after meeting these requirements there are funds left, the firm will pay the residual out in the form of dividends. Thus, if the firm has excellent investment opportunities, the dividend will be smaller than if investment...
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...believe Blaine’s current capital structure and payout policies are appropriate? Why or why not? The main dilemma in the case is whether Blaine Kitchenware’s should choose to repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they must consider whether to partially repurchase the market float or go for a complete buyback where Blaine’s family would become the owner of all the remaining shares. They also have to consider of the effect of the repurchase on various factors like the risks involved in raising a debt especially when they are large, very conservative and debt free. They should also consider things such their acquisition plans, their earnings per share and their dividend per share, ownership structure, capital structure and of course the reputation of the company in the market after the buyback. With this in mind we can consider a few situations and then decide what Blaine should do, keeping in mind the perspective of both the existing shareholders' as well as Blaine's c family’s. Since no debt is being raised, if all the cash & cash securities plus the market securities are used for the buy-back, his family may like this option. Their management will have increased stakes, this will reduce their chance of being acquired and this will provide more dividends to their remaining shareholders. There is a big question facing Blaine and that is why would their existing shareholders want to sell their equity back to the company? Another...
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...Ogden- Chapter 14- Dividend policies and stock repurchases Cash dividends are the two principal means by which a firm pays cash to shareholders. In an ideal market, the result of a dividend payment is that the firms stock price falls by the per share amount of the dividend. Stock Repurchase- the firm uses cash to retire some outstanding shares, buying shares from any investors who choose to dell. In an ideal market, a firms stock repurchases reduce its shares outstanding as well as the firms assets (cash) but have no effect on the market price of the shares Three things you need to determine with dividends 1) Whether the firm should pay a dividend 2) How much the dividend should be 3) What the effect is of a dividend on the market equity value of the firms stock Not as many companies are paying dividends : the phenomenon is due to a change in the characteristics of firms in the market, specifically a shift toward a greater prevalence of firms that have always paid less or no dividends or b) an en mass decision of firms to pay out a smaller proportion of earnings or to pay none at all. Types of firms that have no paid dividends ( small firms and firms with low profitability or strong growth opportunities Are stock repurchases replacing dividends? : increases in repurchases suggest that firms are substituting repurchases for dividends to lower shareholders taxes. The primary effect of repurchases is to increase the already high earnings payouts of...
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...income and in cash. Despite declining sales, margins have remained high and Linear by comparison to other companies has the financial possibility to increase its dividend to higher levels than what it currently is today due to a current cash-to-market cap of 16,23%, zero long-term debt and a low dividend yield of 0,49%. The cash balance has a current effective tax disadvantage of 23,50% while investors would prefer to have the cash distributed through a share repurchase due to the tax being paid later on when the investor’s capital gain is realized. An increased dividend would be a credible signal to investors of a strong belief in future success while a clientele effect from paying a dividend would attract certain investors such as European mutual funds. Agency problems are also reduced through a dividend since less cash is available for unattractive investments while CEO Robert Swanson’s options decrease in value, hence indicating CEO’s belief of long-term company success above shortterm option value. Linear should therefore reduce its cash balance by paying out 1/3 in dividends and 1/3 in share repurchases while keeping 1/3 for future investments. Payout Policy Linear first initiated a dividend in 1992 and has maintained an increasing dividend policy ever since along with fluctuating share repurchases (see chart 2). While the company has experienced strong growth in both revenues and net income, the growth has from time to time been fluctuating but Linear’s...
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