The Essential CFO: A Corporate Finance Playbook

Chapter Six

Considering Dividends and Repurchases

IN REVIEWING THE COMPANY'S INVESTMENT PROGRAM, CFOs will be mindful of the alternative uses of capital to pay dividends to shareholders or to repurchase the company's shares. They will implicitly compare reinvesting cash in the business versus returning cash to shareholders and will seek the best combination to deliver shareholder value.

The alternatives for returning cash to shareholders include:

• Initiating a regular dividend payment
• Increasing an existing dividend rate
• Paying a one-time special dividend
• Repurchasing shares via a tender offer
• Repurchasing shares in the open market

The CFO will evaluate these alternatives in light of the company's dividend policy; the inherent trade-offs between dividends and share repurchases; and the company's strategies for delivering total shareholder return.

DIVIDEND POLICY ALTERNATIVES

Establishing and communicating a dividend policy is fundamental to a company's investor value proposition. The basic alternatives are not paying a dividend, paying a token dividend, maintaining a constant dividend, achieving consistent growth, targeting a payout ratio, targeting a yield, or varying with cash requirements.

Not Paying a Dividend

By not paying a dividend, a company is essentially communicating that it has higher return uses for its capital. This policy is often associated with technology and other high-growth companies, but it is also employed by highly leveraged and economically sensitive companies ...