Reference no: EM133377276
Question: Dividends vs. stock repurchases and underlying big picture issues
Volatility in the stock market is a reality right now given a variety of factors, ranging from the war in Ukraine to high inflation and record levels of U.S. government debt. The WSJ article discussing stock dividends shows how some investors are trying to mitigate their equity risk with high payout stocks. The other article discusses issues for firms when they have excess cash and the reasons behind those excesses.
From stock and bond valuation (M3): Higher expected dividends affect stock prices - however we also know that higher dividends mean lower additions to retained earnings, which, in turn, lower a company's expected growth rate (recall g = ROE * (1-payout ratio)).
From our capital budgeting module (M4): A firm can be limited in the number of positive NPV projects it can take on. Those limitations can be available funds for capital expansion, available equipment and supplies, and/or available qualified managers and staff.
From the current module (M6): How higher dividends and stock repurchases reduce a firm's available funding, sometimes increasing the need for outside funding. The WSJ article discusses stock repurchases and how tax law changes may be a factor, with specifics on a few firms. Be sure to read this article first. A Google search on "stock buybacks 2022" or similar should help find more articles.
The other article discusses the specific reason why a particular firm increased its dividends (see Suncor Energy article from Yahoo.com, attached). FYI, I did a very quick Google search and found the following link that provided info on a specific firm that recently changed its dividends. Recent Dividend Increases and Payout Changes 2023 - MarketBeat
Taking these multiple issues in mind, pick a corporation, whether it is one you work for, a firm you are familiar with, or a firm that you have an interest in. For this corporation (it needs to be publicly traded, whether it pays dividends or not doesn't matter), discuss the following:
Do not choose any of the firms that were discussed in the attached articles, please use those as background only, and pick a different firm for discussion.
What is the firm and which industry is it in? This may be a driver of the firm's situation (e.g. a major construction company may have trouble with building supplies).
Has the firm's dividend payout policy changed in the past few years? Yahoo Finance is a great place to find dividend payouts (select your firm in the search box at the top of the page, go to "historical data" and you will see daily/weekly/monthly stock prices and dividends) This is an example using General Electric Company (GE) Stock Historical Prices & Data - Yahoo Finance
Hint, you will find this discussion easier if you KNOW that the firm has either changed its dividend payout (or plans to soon) or has repurchased stock. It is also possible that you pick a firm that is SELLING stock and/or reducing dividends - that is an equally valid topic for your discussion.
Find news articles that discuss any changes in the company's dividend payout policy or stock repurchases. Were there underlying reasons they gave for the change?
Has the firm made any announcements or provided any insights into capital expenditure issues it may be having?
If you see changes in the firm's dividend payout and/or stock repurchases, yet can't find anything in the business press or company press releases (found on the company's website), based on what you have learned in this course, what do you think could possibly be driving the changes? This is speculation, based on what could be the factors behind the observed changes.