Dividends
Dividend policy is a key decision of financial management, balancing shareholder
expectations with the company’s financing needs. Policies include stable dividends (certainty
but risk of borrowing), constant payout ratio (linked to performance but uncertain cash flows
for investors), residual dividends (prioritising investment, common in growth firms), and zero
dividends (focusing entirely on reinvestment).
In practice, companies also consider signalling effects, shareholder clientele, taxation,
agency costs, and their life-cycle stage. For example, a mature firm may prefer stable
dividends to maintain market confidence, while a high-growth company may adopt a residual
or zero-dividend policy to fund expansion.
Share buyback
Company buy back its own share from the market, reducing the number of share
outstanding.
Ad
Boots EPS and share price
Tax efficiency
Signalling effect
Dis
Market perception- lack of growth
Opportunity cost
Share scrip dividend
Instead of paying cash, the company issues new share to shareholders in proportion to their
existing holdings.
Advantages
Cash conservation- company retain cash
Shareholders choice- they can choose cash or share
Signal of confidence: strong future earnings
Disadvantages
-
Dilution o EPS
Not valued by income seeking
Possible negative signal
Adm cost