CHAPTER 6

DIVIDENDS AND SHARE REPURCHASES: BASICS1

George H. Troughton, CFA

Anthem, Arizona, U.S.A.

Gregory Noronha, CFA

Tacoma, Washington, U.S.A.

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Describe regular cash dividends, extra dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on a shareholder’s wealth and a company’s financial ratios.
  • Describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates.
  • Compare share repurchase methods.
  • Calculate and compare the effects of a share repurchase on earnings per share when (1) the repurchase is financed with the company’s excess cash and (2) the company uses funded debt to finance the repurchase.
  • Calculate the effect of a share repurchase on book value per share.
  • Explain why a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders’ wealth, all else being equal.

1. INTRODUCTION

This chapter covers the features and characteristics of dividends and share repurchases, the two ways a company can distribute cash to its shareholders. A dividend is a distribution paid to shareholders based on the number of shares owned. Dividends are declared by a corporation’s board of directors, whose actions may require approval by shareholders (e.g., in most of Europe and in China) or may not require such approval (e.g., in the United States). ...

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