Narayanan (2018) describes how stock purchases can play an important role in positive financial outcomes. Narayanan looked at why Royal Dutch, a corporation that has a large stock holdings, may opt to buy more stock than they earn in order to compensate shareholders. The ongoing conflict between Iran and the United States has had a negative impact on most oil companies, such as Chevron and Exxon Mobil and Royal Dutch.
How important is stability of dividend policy?
Corporations may use a variety of dividend strategies. Consistent dividends are one example of such strategies. A stable dividend policy (SDP), which is a consistent and predictable payout, provides shareholders with an inconsistency or steady payment that’s independent from market volatility. In essence, dividends are based more on long-term company performance. SDP’s goal is to enhance shareholder value. For example, the Roya Dutch provides consistent dividends to shareholders in order to increase their wealth. The payouts are proportionate to the long-term company return. Dividends may be paid to shareholders quarterly, semiannually or annually by companies. If the dividend policy is consistent, shareholders can be assured that they will get dividends at least one time each year.
Motivations behind Stock Repurchases
Buybacks are a preferred method of capital management. Management seeks shareholder returns and buybacks can often be a way to increase shareholder value. Repurchases of shares can be justified for many reasons. Management might believe the stock market has fallen too quickly and that they should repurchase shares. Several factors, including a generally unfavorable economic environment, scandals, and weaker-than-anticipated profits, might cause the market to ruffle stock values. Royal Dutch had lower 2018 profits than expected in 2018. The company’s sales for 2018 increased by 4.4% to $9.24 Billion, but it fell short of its expectations (Narayanan 2018, 2018). If a company is investing millions in stock it could indicate that its management believes the market has oversold their shares. This can be a good sign. One reason corporations might consider buying back shares is to boost their bottom lines, which investors use to evaluate the company’s worth. This motive is questionable. This could be an issue of management if the intention is to reduce shareholder value rather than improve financial conditions.
How Stock Repurchases Impact Financial Metrics
The number of shares outstanding is reduced by share repurchases, which can affect the company’s income statement. Stock repurchases also have an impact on financial accounts. Distributions do not have an impact on income statements as they are not included as costs. Only announced profits per share will be counted in net profit. Following a stock buyback, the firm’s cash and total assets are often decreased because of the funds needed to buy back the shares (Floyd & Skinner, 2015). Important measures like Return on Equity and Return On Investment (ROI), often rise after a share has been repurchased. In quarterly earnings reports as well as the statement of cash flow, it is common to include the cost of stock buyback. Stock buyback is a major factor in determining profitability indicators like EPS.