...University A Literature Review: Why are stocks repurchases the best payout alternative method? Willie Reddic Table of Contents 1.0 Introduction.……............................................................................................................3 2.0 Beginning Literature of Dividends and the Movement towards Repurchases .......3 3.0 Methods of Repurchases and Key Definition ...............................................................4 4.0 The Positives and Negatives on Methods of Repurchases ……....................................5 5.0 Summary and Conclusion ...........................................................................................10 6.0 References.....................................................................................................................11 1.0 Introduction “A share repurchase distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding.” (Wikipedia Foundation, Inc.) The intent of this paper is to review stock repurchases as the preferred method of alternative payout for shareholders. There are many reasons why firms choose this option. Past literature shows substantial evidence of reasons that range from capital structure adjustments to takeover defense (Bagwell, 1991). However, in my opinion the strongest reason is because stock repurchases can be used as another method of paying out...
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...generating positive cash flows even in a recessionary environment such as 2002”. This idea can be supported by theories such as dividend signaling hypothesis. Numerous studies assert the fact that firms with more favorable inside information optimally pay higher dividends and receive appropriately higher prices for their stock. In addition, Linear’s management is powering through stock repurchase in the recent fiscal years. There are two major reasons explaining this increasing amount of stock repurchase. According to Coghlan, Linear’s employee compensation is mostly based on stock options and profit sharing, and in order to counterbalance the exercise of stock options, Linear is buying back stock. The second major reason is because of lack of profitable investment opportunities. The market interest rate has been very low and also Linear has been managing the cash balance in a rather conservative manner. These are the reasons that the management board indicates, however more supporting reasons of increased amount of stock repurchase is hidden under the surface. First of all, stock repurchases are discretionary compared to dividends. Additionally, stock repurchase doesn’t affect the value of the shareholders. 3.If Linear were...
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...Dividends paid (694m), and repurchases of common stock (1,075m). 4. GRAPH 5. Net income differs from net operating cash flows for several reasons, One reason is noncash expenses, such as depreciation and the amortization of intangible assets. These expenses, which require no cash outlays, reduce net income but do not affect net cash flows. Another reason is the many timing differences existing between the recognition of revenue and expense and the occurrence of the underlying cash flows. Finally, non-operating gains and losses enter into the determination of net income, but the related cash flows are classified as investing or financing activities, not operating activities. Depreciation, which requires no cash outlays, reduced net income by (445 m). Changes in working capital, particularly contracts in process (-391m) and Accounts payable (-171m). A/P, indicates they paid their supplies quicker resulting in a negative cash flow. PAGE 14 1. GRAPH 2. In September 2011, our Board of Directors authorized the repurchase of up to $2.0 billion of our outstanding common stock. Additionally, in November 2013, our Board of Directors authorized the repurchase of up to an additional $2.0 billion of our outstanding common stock. At December 31, 2013, we had approximately $2.3 billion available under these repurchase programs. Stock repurchases will take place from time to time at management’s discretion depending on market conditions. Stock repurchases also include shares surrendered...
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...a multitude of reasons, such as the ability to make use of excess cash that stockpiles when a firm lacks enough viable investment opportunities with positive NPVs. Paying dividends can also send strong signals to investors of positive future earnings while rewarding them with immediate cash returns. From the market’s perspective, merely sending statements that a company is financially healthy doesn’t hold much weight. However, when a firm undertakes the costly action of issuing cash dividends, the message the firm sends is much stronger and more believable. It shows a certain level of expected financial stability since the markets expect dividends to be paid out consistently once they have been declared. While dividends have always been a popular way of distributing money to investors there has been a strong decrease in their issuance since 1978. Back then, about two thirds of publicly traded companies in the United States paid dividends. However by 1999 this number dropped to about one fifth of firms. The main reason for the decline was that until the new tax laws in 2003 passed, top bracket taxpayers paid a capital gains rate of 20%, while being taxed at 38.6% on their dividends. Therefore, paying dividends seemed to be an inefficient use of a firm’s cash and made these stocks less attractive to wealthy investors. Instead many firms favored stock repurchases. In addition, the trend away from dividends could be attributed to changes in publicly traded stocks. In general, firms...
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...Share Repurchase: Is it good or bad? Financial Strategy (BMBA715.2) Date: 27th March 2013 Tutor: Mark Pilkington Author: Nandkumar Mahajan (136866461) Word Count: 3069 Table of Contents Executive Summary ............................................................................................................................. 3 Company capital structure & Shareholder value ...................................................................... 4 Why companies really repurchase shares? ................................................................................ 6 Is there any real value in share repurchase? ............................................................................. 7 Hewlett-‐Packard (HPQ) ................................................................................................................................ 7 Next Plc. (NXT) ........................................................................................................................................... 10 Conclusion ..................................................................................................................
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...shareholders when shares are undervalued or thinly traded; 5. to enhance consolidation of stake in the company; 6. to prevent unwelcome takeover bids; 7. to return surplus cash to shareholders; 8. to achieve optimum capital structure; 9. to support share price during periods of sluggish market condition; 10. to serve the equity more efficiently. Cash Dividends vs. Repurchasing Stock * Reasons for preferring repurchasing stock over paying a cash dividend: * Potential tax advantages * Signaling * Managerial flexibility * Offset dilution from executive stock options * Increase financial leverage Reasons that have been brought forward that apply to share repurchases include: 1. Potential tax savings: in jurisdictions that tax shareholder dividends at higher rates than capital gains, share repurchases have a tax advantage over cash dividends 2. Share price support and signal that the company considers its shares as good investment – some analysts believe that repurchase could mean that the company is buying stocks back because it has no new...
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...The definition of Earnings per share is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as: When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number. Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and...
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...Blaine Kitchenware Case Study Blaine Kitchenware has occupied the industry for over 80 years and continues to gain control in the market it occupies. As the CEO of the company, Mr. Dubinski is faced with the difficult decision of determining what is best for the family company. The following questions will address what decision is the optimal and why it is beneficial for BKI. Ans. 1) The main dilemma in the case is whether Blaine Kitchenware’s should choose to repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they must consider whether to partially repurchase the market float or go for a complete buyback where Blaine’s family would become the owner of all the remaining shares. They also have to consider of the effect of the repurchase on various factors like the risks involved in raising a debt especially when they are large, very conservative and debt free. They should also consider things such their acquisition plans, their earnings per share and their dividend per share, ownership structure, capital structure and of course the reputation of the company in the market after the buyback. With this in mind we can consider a few situations and then decide what Blaine should do, keeping in mind the perspective of both the existing shareholders' as well as Blaine's family’s. Since no debt is being raised, if all the cash & cash securities plus the market securities are used for the buy-back, his family may like this option. Their management...
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...Memorandum To: Richard Johnson, President From: Robert Kinkaid, Financial Vice President Subject: Appraise for the proposals Date: October 4. 2015 This memo writes for appraising president’s proposals. The Depreciation Method: It is hard to eliminate deferred tax liability through changing the depreciation method from tonnage-of-production method to straight line depreciation method. At the first, there is a comparison different depreciation method. Unit-of-production method is a depreciation procedure used for a property which is not in continuous use. The unit of production method is useful when the property's value is more closely related to the number of units it produces than the number of years it is in use. It results in greater deductions being taken for depreciation in years when the asset is heavily used. The second depreciation method is diminishing balance method; this method is applied when the assets revenue decreases over its useful life. The depreciation is high in the early years of the useful life of the asset. The third one is straight line method; this method is applied when the assets generate revenue that is equal or very close to equal over its useful life. Tonnage-of-production method is a unit-of-production method that matches depreciation expense with production volume and therefore revenues. The benefits of this method is to generate more depreciation expense during good times and less when sales is also less, mitigating the cyclical effect...
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...Blaine Kitchenware Inc. Case Analysis: Muhamad Fahad Sohail Table of Contents Blaine Kitchenware capital structure and payout policy 2 Advantages and Disadvantages of share repurchase move 2 New proposal by CEO TO repurchase stocks from the market and its analysis 3 Recommendation to the CEO as a family member and as an independent consultant 3 How does the proposal differ from paying a special dividend of $4.39 share instead? 4 Blaine Kitchenware capital structure and payout policy Blaine Kitchenware Inc.’s current capital structure is not efficient. The incentive for any public company and Board of Directors should be the increase the value of firm through projects, increased earnings per share value, and the lowering of costs. One way many firm’s effectively increase the value of the firm is to minimize the weighted average cost of capital. The weighted average cost of capital is the costs of a firm in the form of debt and equity. Since Blaine Kitchenware is a public company and issues shares, they have an established capital structure model. By taking on no debt, the value of the firm is unlevered and the firm does not gain the advantage of the interest tax shield. It is because Blaine Kitchenware Inc. has chosen to finance projects by the selling of shares and has not made use of debt issuance that the firm’s value is not fully maximized and the weighted average cost of capital is not minimized. If Blaine Kitchenware Inc. took on debt, the value of the...
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...Blaines Kitchenware Blaine kitchenware has occupied the industry for a over 80 years and continues to gain control in the market it occupies. As the CEO of the company, Mr. Dubinski is faced with the difficult decision of determining what is the best for the family company. The following questions will address what decision is the optimal and why it is beneficial for BKI. * Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not? The main dilemma in the case is whether Blaine Kitchenware’s should choose to repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they must consider whether to partially repurchase the market float or go for a complete buyback where Blaine’s family would become the owner of all the remaining shares. They also have to consider of the effect of the repurchase on various factors like the risks involved in raising a debt especially when they are large, very conservative and debt free. They should also consider things such their acquisition plans, their earnings per share and their dividend per share, ownership structure, capital structure and of course the reputation of the company in the market after the buyback. With this in mind we can consider a few situations and then decide what Blaine should do, keeping in mind the perspective of both the existing shareholders' as well as Blaine's c family’s. Since no debt is being raised, if all the cash & cash securities...
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...Case Analysis - FPL Energy FPL Energy is one of the nation’s leading independent generators of electricity. Dedicated to generating clean energy, 80 % of its capacity is fueled by clean and renewable resources. The United States is the nation with the largest generator of wind energy, and it operates the two largest solar fields in the world. FPL Group, with annual revenues of more than $8 billion, is one of the nation's largest providers of electricity-related services. Its principal subsidiary, Florida Power & Light Company, serves approximately 3.9 million customer accounts in Florida. FPL Energy, LLC, and FPL Group energy-generating subsidiary, is a leader in producing electricity from clean and renewable fuels. 2. Historical Overview FPL Group is a far different company today than the one Jim Broadhead joined in January of 1989 when he became president and chief executive officer. FPL Group was then engaged in a number of businesses unrelated to its core electric skills, including insurance and financial services, real estate, cable television, and agriculture. The company's principal subsidiary, Florida Power and Light, was considered a well-managed utility with an emphasis on quality. However, the utility's spiraling costs had resulted in electric rates among the highest in the Southeast. Today, FPL Group is nationally known as a high quality, efficient, and customer-driven organization focused on energy-related products and services. With a growing...
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...million stock repurchase? Recommendations: * We recommend financing the stock repurchase using a $75MM long term loan. * We want to maintain a safe cash balance in order to meet short term obligations. * Taking on debt gives the company the ability to use cash for projects and short term investments. * We want to avoid sacrificing our liquidity ratios in order to finance this repurchase. * * We do not recommend taking on debt beyond the $75M needed to repurchase stock. * The company has sufficient liquidity to finance ongoing operations without taking on additional debt. * Taking on debt more than the $75M needed to repurchase stock would be against company philosophy of maintaining low long term debt levels. * Taking on more debt than required would result in unnecessary interest expense. Analytical Approach Scenario Analysis * Base Case * Revenue, PPE, goodwill, and liabilities are grown at 25% for 2008-2009 and 5% for 2010-2012. * COGS, SGA, and current assets,are forecasted as percents of revenue. * Depreciation is predicted as a percent of PPE. * Interest is predicted as 6% of debt. * Tax rate is predicted to be 36.5% for all forecasted years. * 100% Cash Funded Repurchase * All assumptions are identical as base case except for changes to cash and equity. * $75M is deducted from current assets in 2008 to repurchase stock ...
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...Dividend Policy at Linear Technology | Finance 2013 Page 2 of 13 1. Linear Technology’s Dividend Pay-out Policy Linear Tech announced its first dividend in Oct 13, 1992, and paid the first dividend in Q2 1993. The amount of the dividend is $0.00625/share per quarter (adjusted to stock split). The rationale behind the dividend policy is to show investors that owning Linear’s shares is not as risky as owning shares of most technology companies, and on top of that, to attract dividend income investors. Quarterly dividend has been consistently increased every year by an average of 23.52% (Exhibit 1). The highest hike was in the fourth quarter of 2000, where the company increased the quarterly dividend from $0.02/share to $0.03/share (50% increase). Over the time, the average dividend yield is 0.46%. When the share price was at its peak, the dividend yield was at the lowest (0.15% - 0.19%). In contrast, the dividend yield was nearly 1% in the Q1 2003 when the share price dropped to $20.72 (Exhibit 2). Most of the companies in the Semiconductor Index (SOX) do not pay dividend. Linear Tech is one of the few companies that pays dividend, along with Intel, Motorola, STMicroelectronics, and Texas Instruments. Maxim recently announced to start offering quarterly dividend of $0.02 per share, yielding about 0.21%. Therefore, Linear Tech’s dividend yield is comparable to those dividend paying companies (Exhibit 3). Historically, Linear Tech paid out...
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...Blaine Kitchenware Inc. Take-Home Case Assignment BSAD 342 Prof. Vishwakarma Grady McQuillan Joe Mackay Mitch Chown Alessandro Galeone Discussion questions • Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not? The current capital structure and payout policies for Blaine’s Kitchenware Inc in our opinion is not the most appropriate. The firm’s structure is invested primarily in equity, for the most part (other than twice in their history) not incurring any debt. Although the company originally seemed to pride itself in not incurring debt it’s evident that it has long-term affects on the value of the firm. Whether they considered that less debt would provide them with less risk or not, the fact is that they are not maximizing the value of their firm completely by staying away from debt financing. Although risk will increase when their debt increases, debt financing will lower the cost of capital primarily due to tax reduction. The firm will never reach their full potential by acting this conservative with their financing, and in return this affects their shareholders and payout policies. As stated in the case, “Despite the company’s profitability, returns to shareholders had been somewhat below average”. This is due directly to their net income and the amount of book equity. Subsequently, Blaine’s ROE in 2006 was extremely lower than that of its peers. This creates a big...
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