Stock Dividend Question
How do stock dividends (where companies distribute additional proportional shares in lieu of cash) actually benefit shareholders? Having a hard time wrapping my head around this concept.
What I have questions on:
- Does it dilute existing shareholders? Each shareholder is receiving additional shares in proportion to their existing stake, so ownership percentages should stay constant and there shouldn't be no dilution right? I've seen conflicting information
- How are existing shareholders better off?
Does the stock dividend increase market cap? e.g. by issuing 20% more shares, market cap goes up because each equity holder now has 20% more shares at the same share price - but that doesn't feel right? Residual claimants should still have the same % and $ claim on total assets...so what gives?
If you say market cap remains the same and because of that, share price needs to fall to adjust to the additional shares outstanding - then how in the world are existing shareholders better off (outside of *maybe* additional liquidity from the increased float?) and how is this any different than a stock split???
I know that the accounting is different since the dividend requires us to transfer value from earned capital (retained earnings) to contributed capital (common stock and/or additional paid in capital) - but total book equity stays the same and there's no change to total assets (since this is non-cash) - or is the "actual" benefit in the form of the cash the company saved and is now able to reinvest to grow the enterprise?
Thanks!
1. If you were to give cash dividends and shareholders would want to buy more shares in the company, they will incur broker fees to buy more shares (on top of dividend tax). On the contrary, if they receive shares, they can decide to keep them or sell them. So for those shareholders that like the company and want to remain in it, stock options are better. Moreover, the idea that all shareholders receive proportional shares to their ownership brings an interesting corporate governance issue: The awareness that if one decides to sell some of the shares given as part of the dividend they will lose % control in favor of those shareholders that kept their shares. So it builds an incentive for major shareholders to keep their shares. Another idea is that the more diluted equity becomes, the cheaper stocks become, so it could build some demand in the market that makes the existing shares rise in price. This last idea combined with the previous one (shareholders keep their shares) may create more demand for stock because as they become cheaper, they sell faster, and because major shareholders are not selling their shares the demand may push prices up (think for example about the supply and demand of only 20% of the total shares being traded vs. 70%).
2. If you give shares instead of cash you retain more liquidity. This may indicate that the company is either (i) having liquidity issues or (ii) planning to expand. If it's the first, share prices may fall, if it's the 2nd, shares may raise in price reflecting future growth and shareholders get to receive a higher profit (if they were to sell their shares) thanks to the stock dividend event.
Those are just the first to pop into my mind, but I'm sure that in some CorpFin textbooks (Myers/DeMarzo/Vernimmen/Ross) you may find many more reasons/benefits.
Tempore dignissimos explicabo expedita. Tenetur cumque enim et omnis corrupti deserunt. Consequatur voluptas recusandae assumenda quia est. Necessitatibus ullam numquam sit. Ut non et est eum officia.
Harum aut omnis temporibus debitis illo sed. Pariatur id voluptas voluptatem voluptatum odit. Cupiditate sed temporibus impedit et voluptatem voluptatem sunt mollitia. Omnis asperiores impedit est blanditiis enim iure et. Et dolores odit dolorem corporis. Error et esse fugiat nihil totam harum.
Fugit corrupti debitis ut quia quas est ut expedita. Qui sit aut adipisci nobis molestiae ut nemo. Quos sequi est illum quis est eveniet odio.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...