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
Importance of Stable Dividend Policies
Stable dividend policies are important for a number of reasons. First, they provide investors with a predictable stream of income. This can be especially important for retirees and other investors who rely on their investment income to live.
Second, stable dividend policies can help to attract and retain investors. Investors are more likely to invest in companies with a history of paying reliable dividends.
Third, stable dividend policies can help to signal the company's financial strength and stability to investors. Companies that can afford to pay consistent dividends are generally seen as being well-managed and financially sound.
Reasons for Stock Repurchases
There are a number of reasons why companies repurchase their shares. Some of the most common reasons include:
- To increase earnings per share (EPS): When a company repurchases its shares, the number of shares outstanding decreases. This results in an increase in EPS, as the company's earnings are now spread over fewer shares.
- To improve return on equity (ROE): ROE is calculated by dividing net income by shareholder equity. Shareholder equity is reduced when a company repurchases its shares. This results in an improvement in ROE.
- To boost the stock price: Stock repurchases can help to boost the stock price by reducing the supply of shares and increasing the demand.
- To reward shareholders: Stock repurchases can be seen as a way to reward shareholders by returning capital to them.
Impact of Stock Repurchases on Financial Metrics
Stock repurchases can have a significant impact on a company's financial metrics. Some of the most notable impacts include:
- Earnings per share (EPS): As mentioned above, stock repurchases can increase EPS. This is because the company's earnings are now spread over fewer shares.
- Return on equity (ROE): Stock repurchases can also improve ROE. This is because shareholder equity is reduced when a company repurchases its shares.
- Price-to-earnings ratio (P/E ratio): The P/E ratio is calculated by dividing the stock price by the EPS. When EPS increases, the P/E ratio decreases. This can make the stock more attractive to investors.
- Cash flow: Stock repurchases can reduce a company's cash flow. This is because the company is using cash to repurchase its shares.
- Book value: Stock repurchases can also reduce a company's book value. This is because shareholder equity is reduced when a company repurchases its shares.
Part 2: Supply Chain Management
Company of Choice: Amazon
Days of Working Capital
Amazon's days of working capital (DWC) for the most recent quarter (Q1 2023) are 35 days. This is calculated by dividing current assets by current liabilities.
Comparison to Competitors
Amazon's DWC is lower than the average DWC for its competitors in the retail industry. This is a good thing, as it means that Amazon is able to efficiently manage its working capital.
Importance of Comparing to Industry Average
It is important to compare a company's DWC to the industry average because it can provide insights into the company's efficiency. A lower DWC indicates that the company is able to efficiently manage its working capital. This can be a competitive advantage, as it allows the company to invest in growth opportunities or to return cash to shareholders.
How a Well-Managed Supply Chain Can Come into Play
A well-managed supply chain can help a company to reduce its DWC. This is because a well-managed supply chain can help to reduce inventory levels and improve accounts receivable collection.
For example, Amazon uses a variety of supply chain management techniques to reduce its DWC. Amazon uses just-in-time inventory management to reduce inventory levels. Amazon also uses a variety of
Sample Answer
Stock Repurchases and Financial Metrics
Introduction
In the article "Royal Dutch Shell Finally Delivers Big Stock Buyback, but Shares Break Support" by Aparna Narayanan, the author discusses the company's decision to repurchase $25 billion of its shares over the next two years. This is the largest stock buyback program that Royal Dutch Shell has ever announced.
The article also discusses the potential impact of stock repurchases on key financial ratios. Stock repurchases can have a favorable impact on earnings per share (EPS), return on equity (ROE), and price-to-earnings ratio (P/E ratio). However, they can also reduce the company's cash flow and book value.