Running Head: CORPORATE FINANCE 2
Shares, Dividends, and Stock Prices
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Author Note
In finance, shares refer to units of a company’s profit offered in equal amounts of profits to all its shareholder through dividends. There are various reasons, depending on whether the organization is a growing business or a stable company, that an organization may decide to payout rates of dividends or buy back its shares. Other companies may choose to cut off the dividends. This paper discusses the reasons why a company may select one of the two payout options, or eliminate its dividends and the impact of doing to a company’s stock value.
For a company that is growing, it may decide to increase the payout rate per dividend to increase its net profit. The profits would then be used to pay out the dividends. Another reason why the company may decide to increase its payout rate is due to a change in the company’s strategy that may lead to the organization requiring it to invest less of the profits on expansion and growth.
A company may decide to buy back its shares from the shareholders due to many reasons. Finances raised from shares are often meant for the expansion of a company. If there is no visible growth opportunity in the future, holding on to the equity funds would not benefit the company. Also, for business that have already expanded to the optimum, holding on to the equity funds is more of a burden and therefore, the company may decide to buy back the shares.
Sometimes, a company may decide to cut its dividends. The main reason why the company may choose to do so is to preserve its finances for times of economic uncertainty. However, lowering the dividends reduces the stock price of the company, especially if the company’s competitors maintain their dividend rates (Basu, 2019). Thus, it is not advisable for a company to cut its dividends even if the future is uncertain.
In conclusion, a company that has good financial policies would thrive even through the worst seasons. It is evident from the discussion that once there is no significant room for growth, an organization may decide to buy back its shares.
Reference
Basu C., (2019). What Happens When a Company Cuts Its Dividends? Smallbusiness.chron.com. Retrieved 21 February 2019, from https://smallbusiness.chron.com/happens-company-cuts-its-dividends-22915.html