COMMON SHARE AND DIVIDEND
The common shareholders are the real owner of the company.
It is permanent capitalization of company.
It is an ownership security.
Risky investment among other financial investment.
Common stock holders get return from it.
Key Features
Ownership rights : they are real owner of co. they have voting rights to elect themselves as board of directors.
Claims in Income
Claims in Asset : When liquidation arise the stockholders get only after payment of all outsiders.
Maturity : no maturity period. i.e. not refundable
Why corporate issue stock ?
To Collect fund.
Why People buy stock ?
Expecting to earn
a) Dividend
b) Capital gain :
Rise in initial price. i.e.
Beg price=Rs. 500,
After 5 yrs, price of share = Rs. 1150
Capital gain = Rs.1150-500=Rs. 650
Generally the return from common stock will be higher than other financial security.
In other word, Return From :
Com. Stock debenture
Dividend + capital gain > Interest
Reason : Higher the risk, Higher will be the return.
Dividend
It is share of profits paid to shareholders either in form of cash or additional nos. of shares.
That part of EAS which is distributed to the shareholders.
It is the minimum return to investors.
Dividend policy and payments, year-end share price and tax value
Dividend policy
Dividend growth reflects progress in earnings: Swiss Re's policy is to focus on sustainable dividend payout and active capital management while maintaining superior capital adequacy and credit ratings. Dividends are typically paid out of current earnings. Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
Types of Dividend
Cash Dividend
Stock Dividend
P-E Ratio: MPS divided by EPS
The market’s current assessment of the company’s worth in relation to its earnings.
It shows how much investors are willing to pay per rupees of reported profit.
Market Price Per Share
It is determined by market function. i.e. according to demand and supply of that shares.
Demand and supply of shares are influenced by the company’s EPS, dividend paid etc.
Dividend Policies
Dividend policy and payments, year-end share price and tax value
Dividend policy
Dividend growth reflects progress in earnings: Swiss Re's policy is to focus on sustainable dividend payout and active capital management while maintaining superior capital adequacy and credit ratings. Dividends are typically paid out of current earnings. Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
1.Stable Dividend Per Share
Constant amount of dividend is paid unless remarkable changes occurs in earning
of company. After remarkable changes the amount of dividend would be increased.
E.g. Rs. 30 per share.
2. Constant Payout policies
Dividend is paid at certain ratio of earning.
E.g. 50% dividend payout ratio
it means 50% amount paid as dividend out of earnings
3. Low regular dividend plus extras
Low dividend amount is guaranteed and extra div. amount is paid at time of profit more than certain level. E.g. Rs. 15 per share is guaranteed and extra 40% dividend is paid when the earning exceeds 10 lakhs(e.g.).
Reason of stock Dividend
If the level of earning is limited but there is unlimited opportunities of investment.
For tax saving.
For under capitalization.
To flow positive signal to the market
(Nepalese context)
Reason of cash Dividend
It is the return of investment
If there is no better opportunity to made investment in market.
Effect of cash & Stock Dividend on MPS
1) If there is no signaling effect (market information), MPS decreases
2) If there is signaling effect,
positive signaling effect :- MPS increases (+ve signal of stock dividend)
Negative signaling effect :- MPS decreases
Effect of Dividend Distribution
Div ↑ Demand of Stock ↑ MPS ↑Value of Firm ↑
Div↑ R.E.↓ Future Growth ↓
Due to ↓ in R/E, profitable opportunities can’t be grabbed which ultimately
affects the targeted growth rate.
Therefore, optimal dividend policy should be followed by the company which
tries to maintain the value of the firm and growth rate. i.e. trade-off
between value of the firm and growth rate.
Div ↑ Demand of Stock ↑ MPS ↑Value of Firm ↑
Div↑ R.E.↓ Future Growth ↓
