DIVIDEND POLICYISAA RUTH F. LESMA G14-0139

TYPES OF DIVIDEND POLICIES Constant-Payout-Ratio Dividend Policy Regular Dividend Policy Low-Regular-and-Extra Dividend Policy

Constant-Payout-Ratio

A dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.

Example

Regular Dividend Policy

A dividend policy based on the payment of a fixed-peso dividend in each period.

This policy provides the owners with generally positive information, thereby minimizing their uncertainty.

Example

Low-Regular-and-Extra

A dividend policy based on paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal in a given period

Extra dividend is an additional dividend optionally paid by the firm if earnings are higher than normal in a given period.

OTHER FORMS OF DIVIDENDS Stock Dividend Stock Splits Stock Repurchase

Stock Dividend

The payment, to existing owners of a dividend in the form of stock.

In accounting sense, the payment of a stock dividend is a shifting of funds between stockholders’ equity accounts rather than the use of funds.

Example

Shareholder’s Viewpoint

The shareholder receiving a stock dividend typically receives nothing of value. After the dividend is paid, the per-share value of the shareholder’s stock decreases in proportion to the dividend in such a way that the market value of his or her total holdings in the firm remains unchanged. The shareholder’s proportion of ownership in the firm also remains the same, and as long as the firm’s earnings remain unchanged, so does his or her share of total earnings.

Company’s Viewpoint

Firms find the stock dividend a way to give owners something without having to use cash. Generally, when a firm needs to preserve cash to finance rapid growth, a stock dividend is used. When the stockholders recognize that the firm is reinvesting the cash flow so as to maximize future earnings, the market value of the firm should at least remain unchanged. However, if the stock dividend is paid so that the cash can be retained to satisfy past-due bills a decline in market value may result.

Stock Splits

A method commonly used to lower the market price of a firm’s stock by increasing the number of shares belonging to each shareholder.

Stock splits are often made prior to issuing additional stock to enhance that stock’s marketability and stimulate market activity.

Example

Reverse Stock split is a method used to raise the market price of a firm’s stock by exchanging a certain number of outstanding shares for one new share.

Stock Repurchases

The repurchase by the firm of outstanding common stock in the marketplace; desired effects of stock repurchases are that they either enhance shareholder value or help to discourage an unfriendly takeover.

Stock repurchases enhance shareholder value by:(1) reducing the number of shares outstanding and thereby raising earnings per share,(2) sending a positive signal to investors in the marketplace that management believes that the stock is undervalued, and(3) providing a temporary floor for the stock price, which may have been declining.

Example

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