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This theory reasons that if a firm's investment policy doesn't change, the value of the firm cannot change with dividend policy. Therefore, investors should be indifferent to receiving either dividends or capital gains. but, the Miller-Modigliani Hypothesis has underlying assumptions that don't hold in the real work. It assumes there are no tax differences between dividends and capital gains and that companies do not use the excess cash they have as result of not paying the dividends for bad projects or acquisitions (Dividend policy). As these situations occur, there are distinct advantages and disadvantages of dividends
3.1 Advantages of Dividends and, even if ordinary income and capital gains are taxed the same, dividends still have a tax disadvantage because investors do not have the choice of when to report the dividend as it is the case with capital gains (Returning cash to owners: the firm's payout policy).
Stockholders may value regular cash payments that dividends offer and many may not face the tax disadvantages of dividends (discussed in the next session of this paper). and, unlike volatile stock prices firms generally do not change their dollar dividends frequently; dividends are said to be "stick."
Dividends tend to follow a much smoother path than earning do. (Returning cash to owners: the firm's payout policy).
Dividends now are more certain than capital gains later and this is often considered an advantage of dividends. but, this does not mean that dividends are more valuable than capital gains because the appropriate comparison should be between dividends today and price appreciation today. Unfortunately, this is a common fallacy known as "the bird in the hand fallacy" and it should be avoided when comparing dividends to capital gains (Dividend policy).
A firm's change in dividend policy sends a strong market signal about their future cash flows; a dividend increase indicates that the firm expects to have higher future cash flows which translate into higher share prices. Further, making a commitment to pay dividends imposes financial discipline on managers who are under greater pressure to make sure that free flow cash flows are not wasted (Returning cash to owners: the firm's payout policy).
3.2 Disadvantages of Dividends
4.0 Recommendations
In summary, it's difficult to say whether a stockholder is better off with dividends or stock buybacks. Stockholders should explore underlying reasons behind either policy choice made by a company and they should focus on quarterly net income fundamentals in analyzing earning reports rather than just types of metrics that are easily influenced by stock buybacks. Further, stockholders need to explore their own preferences for regular cash payments vs. stock price appreciation and asses their individual tax situations to decide which type of policy will truly benefit them the most.
Bibliography
Buybacks vs. dividends (2006, February 2). Nightly Business Report. http://www.pbs.org/nbr/site/onair/transcripts/060202c/
Dividend policy. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/dividend.html
Hughes, C. And O'Doherty, J. (2007, February 22). Companies put faith in buy-backs and special dividends. Financial Times, p. 22.
Kennon, J.
The benefits of stock buy back programs. http://beginnersinvest.about.com/cs/newinvestors/a/060401a.htm
Palley, T. (2007, February 19). Expand sarbox. Economist's view. http://economistsview.typepad.com/economistsview/2007/02/thomas_palley_e.html
Returning cash to owners: the firm's payout policy. http://72.14.253.104/search?q=cache:zDoNp6dRRwYJ:www.business.uiuc.edu/gpinteri/Fin321lect17.ppt+%22dividends+are+sticky%22&hl=en&ct=clnk&cd=7&gl=us
Bibliography
Buybacks vs. dividends (2006, February 2). Nightly Business Report. http://www.pbs.org/nbr/site/onair/transcripts/060202c/
Dividend policy. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/dividend.html
Hughes, C. And O'Doherty, J. (2007, February 22). Companies put faith in buy-backs and special dividends. Financial Times, p. 22.
Kennon, J.
The benefits of stock buy back programs. http://beginnersinvest.about.com/cs/newinvestors/a/060401a.htm
Palley, T. (2007, February 19). Expand sarbox. Economist's view. http://economistsview.typepad.com/economistsview/2007/02/thomas_palley_e.html
Returning cash to owners: the firm's payout policy. http://72.14.253.104/search?q=cache:zDoNp6dRRwYJ:www.business.uiuc.edu/gpinteri/Fin321lect17.ppt+%22dividends+are+sticky%22&hl=en&ct=clnk&cd=7&gl=us
While stock may be used instead of monetary motivation, management may inflate the value of these and gain more from employees with less investment. Furthermore, a buyback strategy may result in a negative external business image for the company when stock is later revealed to be of lower value than merited by the buyback price. 3. I believe that stock buybacks are indeed a strategy. A strategy can be defined
Even their regular dividends were increased from 8 cents per share per quarter to 16 cents. This is quite a high rate of increase. This sort of announcements was also made by banks like Wachovia and Mellon, and consumer staples like Altria and Kraft. The attitude of the investors can be seen from the fact that the companies which have traditionally paid dividends have performed better in terms of
Dividend Tax Capital gains and dividend taxes were both initiated in the early 1970's, by the Democratic Party. Before dividend taxes were enforced, the government made its money through higher aftertax yields, The dividend tax was originally supposed to be a progressive measure, so that the wealthiest paid correspondingly more than the poorest because they had benefited more. At this time, only the wealthy invested in stocks. This is no longer
("Gates, Bill," 2007) the company is in fact considered a regional financial backbone, in the Seattle-Redmond area where its world headquarters are. The whole region and to some extent the whole world takes notice when Microsoft announces financial strategies and changes or when stocks rise or fall. The software maker said it would buy back $20 billion through a tender offer set to be completed on Aug. 17. The company
Dividends A regular cash dividend is paid out of the company's cash supply. The dividend can be at a fixed rate, or can be loosely tied to the company's net income. This is the most common form of dividend, and is paid under most circumstances. Whereas a regular cash dividend is a recurring dividend, an extra cash dividend is a non-recurring dividend (Investopedia, 2012). This is a one-time dividend that is
Investors should be more wary today. It would be expected that a similar announcement by Intel would not bring forth such a fevered response. The dot.com bubble has burst and dissipated, and in its wake consumers are more wary of techniques to inflate stock value on paper. In 2005, Intel attempted a similar technique as IBM. However, the slightly more skeptical business press was quick to point out the 'fancy