In the short article “Royal Dutch Shell Finally Delivers Big Stock Buyback, but Shares Break Support” by Aparna Narayanan (see below), stock repurchases may produce favorable effects on key financial ratios.
Narayanan, A. (2018, July 26). Royal Dutch Shell finally delivers big stock buyback, but shares break support. Investors Business Daily. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=131003207&site=ehost-live&scope=site
After reading the article, write what addresses the prompts below.
Include an introduction that summarizes the article.
Analyze the importance of stable dividend policies.
Determine reasons behind stock repurchases.
Analyze how individual financial metrics are specifically affected by stock repurchase plans and returns.
Part 2: Supply Chain Management
Select a company of your choice and calculate the most current days of working capital (DWC) that are available. Review page 656 in the textbook, and watch the short video segment “Working Capital,” which is one of the required unit resources in this unit. In addition to your calculations, include the information below
How does this company’s ratio compare to those of its competitors?
Why is comparing this ratio to the industry average important?
Explain how a well-managed supply chain can come into play here.
Full Answer Section
Third, stable dividend policies can help to improve a company's reputation among investors. Companies that have a history of paying regular dividends are seen as being reliable and trustworthy. This can make it easier for the company to attract new customers and partners.
Reasons behind stock repurchases
Companies repurchase their own stock for a variety of reasons. Some of the most common reasons include:
- To return capital to shareholders: When a company repurchases its own shares, it is essentially returning capital to shareholders in the form of cash. This can be a way to reward shareholders for their investment and to show that the company has confidence in its future prospects.
- To increase earnings per share: When a company repurchases its own shares, it reduces the number of shares outstanding. This can increase the company's earnings per share, which is a key financial metric that investors look at when making investment decisions.
- To support the stock price: When a company repurchases its own shares, it can help to support the stock price. This is because the company is buying back its own shares, which reduces the supply of shares on the market.
- To prevent hostile takeovers: Companies may repurchase their own shares in order to prevent hostile takeovers. When a company repurchases its own shares, it increases the cost of acquiring a controlling stake in the company. This can make it more difficult for a potential acquirer to take over the company.
Comparison of stable dividend policies and stock repurchases
Stable dividend policies and stock repurchases are both ways for companies to return capital to shareholders. However, there are some key differences between the two approaches.
Dividend payments are made to all shareholders, regardless of whether they sell their shares. Stock repurchases, on the other hand, are only beneficial to shareholders who sell their shares to the company.
Dividend payments are also a more predictable way to return capital to shareholders. Stock repurchases, on the other hand, can be more unpredictable, as the company can repurchase shares at any time and for any reason.
Finally, dividend payments are typically taxed as ordinary income, while stock repurchases are taxed as capital gains. This means that investors may have to pay lower taxes on stock repurchases than on dividend payments.
Which approach is better?
There is no one-size-fits-all answer to the question of whether a stable dividend policy or stock repurchases are better. The best approach for a particular company will depend on a number of factors, including the company's financial situation, its industry, and its shareholder base.
Companies with a strong financial position and a history of paying dividends may want to consider adopting a stable dividend policy. This can help to attract and retain investors, reduce the volatility of the stock price, and improve the company's reputation.
Companies that are looking to return capital to shareholders in a more efficient manner may want to consider stock repurchases. Stock repurchases can also be used to support the stock price and to prevent hostile takeovers.
Conclusion
Both stable dividend policies and stock repurchases can be effective ways for companies to return capital to shareholders. The best approach for a particular company will depend on a number of factors, including the company's financial situation, its industry, and its shareholder base.
Sample Answer
Importance of stable dividend policies
Stable dividend policies are important for a number of reasons. First, they can help to attract and retain investors. Investors are often attracted to stocks that pay a steady dividend, as this provides them with a reliable source of income. Additionally, stable dividend policies can help to reduce the volatility of a stock's price, which can make it more attractive to investors.
Second, stable dividend policies can help to communicate a company's financial strength to investors. A company that is able to maintain a stable dividend policy is typically seen as being financially sound and stable. This can make it easier for the company to raise capital in the future.