2023 Firms deciding to make large increases in their dividend payouts or starting a stock repurchase program is dictated

Firms deciding to make large increases in their dividend payouts or starting a stock repurchase program is dictated by the strategic goals for the company.  If the company is looking to reinvest in the firm and start new initiatives, then paying out a dividend would not be beneficial to the company.   A company deciding to repurchase shares of stock from investors reduces the number of outstanding shares and enables the remaining shares to be more valuable.  Before making either decision, the strategic vision for the company must be understood and how to ensure growth and success for the company in the future.  According to Frankel (2018), there are two main ways that companies can return profits to shareholders; dividends and share buybacks. And while the idea behind both ways is to give money back to investors, the best method depends on a few things, such as the company’s goals, valuation of the stock, and the investor’s personal goals.  Before making any decision about which method to use, either dividend or stock repurchase, the company needs to ensure that all capital needs are met and that initiatives planned for future growth have the correct amount of resources allocated.  For example, Apple Inc. does not pay out dividends, nor do they have a stock repurchase program; they sit on their profits.  Compiling a cash reserve, Apple ensures that if they need capital in the future, they have enough cash to cover the necessity. 

The strategic vision will impact the method a company will use to return profits to investors.  A company needs to ensure that its debt has been covered before deciding what to do with the profits earned during the year.   Utilizing the repurchase program allows the company to maintain more control over the stocks.   According to Kennon (2019), the primary advantage of buyback programs is that an investor’s shares become more valuable and represent a greater percentage of equity in the company.  Investors understand that decreasing the number of available shares increases the company’s earnings per share.  A stock repurchase program allows a company to move from equity financing to debt financing, which enables more cost efficiency within the company.   However, not everyone views a stock repurchase program as positive; some people will look at the company as not considering their employees over the shareholders.   Bad publicity and public perception will cause some companies to refrain from using stock repurchase programs.  

Firms choose to cut or eliminate their dividends for various reasons, such as reinvesting in the company, reduce their pay-out ratio or declining profits.   Dividends being paid out the impact the company profit, so deciding to eliminate dividends essentially puts the company in a strategic position to increase growth.  According to Stevenson (2018), a decision over cutting the dividend can come down to whether company management is focusing on the long-term health of the business, or the short-term impact on the share price.  The best decision for any long-term investor would be for the company to cut dividend payouts to ensure that the balance sheet remains stable for the company.  Financial stability for the company is more important than paying out dividends, because if the company has to borrow money to make dividend payouts, then they are increasing the debt that will inevitably impact the investors in the long run if the company goes bankrupt.  Stock prices will be affected by a dividend cut because investors will assume that the company is having financial issues and sell off the shares they own, which will cause the share price to fall.  According to Basu (n.d.), companies can adopt certain measures to mitigate the impact of a dividend cut, starting with full disclosure.  Once again, communication is the key to a successful business.  If a firm needs to cut dividends, they should communicate to the investors how they intend to utilize the profits from the company and how it will benefit the investors in the future. 

 

Reference

Basu, C. (n.d.).  What Happens When a Company Cuts Its Dividends?  Retrieved from https://smallbusiness.chron.com/happens-company-cuts-its-dividends-22915.html

Frankel, M. (2018, June 1).  Dividends vs. Stock Buybacks: Which Is Better?  Retrieved from https://www.fool.com/investing/general/2016/04/23/dividends-vs-stock-buybacks-which-is-better.aspx

Kennon, J. (2019, September 30).  The Benefits of Stock Buyback Programs.  Retrieved from https://www.thebalance.com/the-benefits-of-stock-buy-back-programs-356332

Stevenson, E. (2018, February 20).  Why Companies That Cut Their Dividend Can Be Attractive Income Investments.  Retrieved from https://www.schroders.com/en/insights/economics/why-companies-that-cut-their-dividend-can-be-attractive-income-investments/