A company must have an appropriate payout policy. A company gets exact suggestion that it must payout in cash at the moment when no positive-NPV projects are there as its alternative. A number of managers in different companies say that they have projects high NPV, no matter they say true or false.
In addition, some companies also govern some other firms or small organizations with some financial flexibility. These are free from any debt or requirement of payout. Statement of Warren Buffet is not followed by many companies these days. According to him, “We will pay either large dividends or none at all if we can’t obtain more money through reinvestment [of those funds].”
In case you have a question that what kind of payout is perfect for all. So, is it payout through dividends or payout through payout through share purchases? Though, this was very essential to know before 2003, when before declaring of double taxation, but in these days each corporation thinks of its profit, and then takes proper step according to that. Dividends are assumed as more accurate and perfect for long term, however personal income tax matters in this case as they charge more.
There are some important points related to this chapter “Equity Payouts : Dividends and Funds” and these are as follows –
- There are two parts of equity payout – Share repurchases and Dividends. There are two types of share repurchases as open market and auction. In case of dividends there are two different ways as special and ordinary.
- In case of perfect market, the way of paying out does not matter, a firm can select reinvestment, or pay out cash.
- For investors if it is “eating Substance”, then repurchases of shares and dividends both are in equal level.
- EPS does not get raised by repurchases of share any time.
- Both kinds as non-tendering as well as tendering share holders get profit through share repurchases.
- Issuing and equity payouts are just opposite to each other.
- Buyback of shares are completely perfect for all. If you compare it with dividends, then repurchasing of shares will be better than dividends.
- Dividend smoothing is the behavior of payout through ordinary dividends. This is somehow suitable for company as well as managers and they continue and financial market desire to be continued with dividends.
- Stock options make managers beneficial when they select share repurchase rather than dividend payout.
- Ratio of dividend to earning is same for a long time. It is just around 50% and stable since the Second World War.
- Share repurchases and dividends have the equal value these days.
- Decline of dividend/price ratio was 4-5% in the year 1980, but it is 2% in these days.
- If you go through in 80s, then it would be clear that out of two firms one would be paid dividends and in these days you will get that one out of four firms are paid division.
- The ratio net-payout is sum of share repurchase and dividends minus issuing of share.
- Repurchase of shares and cash amount through dividend is similar. For large repurchases, the response is also very large.