Dividends and Share Buy-Backs
Dividends refer to the money regularly paid to shareholders by a company. Often the money is paid quarterly. Modigliani and Miller argued that dividends are irrelevant and that they do not affect the value of a firm’s shares. However, as Dan McCrum (2016) argues, dividends are exactly what investors get from an investment in the company. According to McCrum, dividends matter. In recent years, companies have been cutting their payout to shareholders due to the hard economic times in Europe, (Oakley 2016). The interest rates have also reduced to zero or negative favouring borrowing that equity. In the UK, according to Mark Roe (2016), the introduction of 8% surcharge will force banks to rely less on equity and more on debt.
In such a situation in the economy, when a company has higher dividend payout than the rest of the players in the market, investors will view the payout as being unsustainable, (Arnold 2016). This is the case of HSBC which has maintained a progressive payout as opposed to the trend in the economy. Companies prefer giving back their reserves to investors instead of keeping them in bank accounts, (Dunkley 2016). This occurs especially due to minimal expansion plans. The company can give back the money to investors through share repurchase or through dividends.
Dividends are preferred when the company intends to keep more equity. In cases where the company has to reduce its equity, it will opt to repurchase the shares from its shareholders. Another reason for repurchase could be the taxation policies. If the tax rate on dividends is higher than the tax charged on capital gains, then the shareholders will prefer the company buys back the shares instead of issuing dividends.
Reference
Arnold, M., 2016. HSBC chief critics who claim 8% yield is 'ridiculously high' and cannot be sustained. Financial Times.
Dunkley, E., 2016. Lenders line up payouts as strengthened balance sheets add to sector confidence. Financial Times.
McCrum, D., 2016. Payouts to shareholders are important, but maintaining them can levy a high cost. Financial Times.
Oakley, D., 2016. Industry requirement for 4.6% yield puts specialist managers at risk of being forced out of sectors. Financial Times.
Roe, M., 2016. Osborne should think again on his bank surcharge. Financial Times.
