Hacker News new | comments | show | ask | jobs | submit login
Applied Game Theory or How to pay a dividend without paying a dividend (meissereconomics.com)
71 points by Hermel 600 days ago | hide | past | web | favorite | 85 comments



There is no game theory here. The value of each person's decision is not affected by the decisions of others.

It's important to remember that the company's shares are traded on a public market.

The shares distributed by the company are valuable and can be sold for the same amount of money as the dividend you could have received.

The key fact that the article ignores is that the shareholders collectively own the company. So if they all decline the dividend, they are effectively electing for the company they own to hold the cash (that they own by owning the company).


What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend date.


Not exactly.

If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases).

And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company.

In other words, shareholders will be happier with the cash in their hands than in the company's bank account.


How could cash not affect a company's valuation? This implies that the market isn't merely irrational but idiotic. A company holding a billion dollars in cash and nothing else should be worth a billion dollars (maybe slightly less to account for the risk that the board could squander the money).


Imagine company A, which has no operation, only $1B in cash.

How much money do you need to buy this company?

The answer is zero.

You borrow 1B.

Buy the company.

Use the cash to pay back the debt.

Cash has no influence (with exceptions and edge cases) on a company's enterprise value.


If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value.

Your broken logic could be applied to literally anything.

> Imagine company A, which has no significant cash, only a $1B tire manufacturing business.

> How much money do you need to buy this company?

> The answer is zero.

> You borrow 1B.

> Buy the company.

> Sell the time manufacturing business to pay back the debt.

> Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value.

Or how about this?

> Imagine a used Honda Civic, which is a car that costs $10k.

> How much money do you need to buy this car?

> The answer is zero.

> You borrow $10k.

> Buy the car.

> Sell the car in parts on eBay to pay back the debt.

> Car parts have no influence (with exceptions and edge cases) on a car's value.

The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.


Seriously, no.

Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price.

Buying cash gives you no additional value.

So trust me, the amount of cash does not change Enterprise Value.

If you don't believe me, read any valuation materials, such as Damodaran's.


You quietly changed from talking about stock price to talking about enterprise value, a term which is defined to exclude cash. This is extremely disingenuous.

If you want to argue that there is no value in taking over a company for its cash, sure. If you want to argue that the market sees no value in cash, no.


I think we can all agree, that when an dividend is issued, particularly one that is significant compared to the "Valuation" of the company, that the stock price (excluding normal day-day market and stock volatility) will drop an amount very close to the amount of the dividend. So, for example, let us say that we have a nice monopolistic utility with (for the sake of argument), very little competition. For example, the Electricity and Water Utility in Dubai, UAE. Let us say that the population has stabilized, and that it has $10 Billion in cash, has a nice stable cost structure with no major depreciations in the future, and are generating $10 million in FCF and profit every year, on assets that are worth $1B, and that the risk free interest rate is 1%. If I were an investor, I would pay $11 Billion for this company. The Cash is worth $10B, and the Business is worth $1B (1% of $1B is $10 million).

Now, let us say the business issues a special Dividend of $10B. Can we all agree that a rational investor, on the ex-date, would now only spend $1B on this company, instead of $11B?


The market is often an idiot.


That's wrong. Cash obviously affects the value of a company, as reflected in the stock price. If a company lights $1B on fire the value of the company will go down, if they find $1B in the couch cushions the value will go up.

What might be confusing is that one dollar of cash at a company doesn't neatly translate into one dollar of value in the stock price. At a poorly run company with a history of bad acquisitions $1 of cash might be worth 50 cents because investors think that the company will waste the money rather than give it back as dividends. But a growing company might borrow money and have the stock price go up, if investors think it will be invested well.


See the answer I posted above.

Under certain conditions, the same is valid for debt. Capital structure of a company (under certain conditions) has no impact on the value of the company.

This is the Modigliani-Miller theorem, it got Modigliani (but sadly, not Miller) a nobel prize.

Fine print: there are a bunch of conditions in the case of debt, due to tax, and so on.


I'm not sure I understand what you are saying. I receive dividends from a bunch of companies, and, with almost no exceptions, the stock prices drops by almost exactly the dividend value on the ex-dividend date.

Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price?


> Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price?

Exactly!


> cash DOES NOT change a company's valuation

That's wrong. As you say later, the Enterprise Value (= Market Cap - Cash + Debt) doesn't change when the company accumulates cash. But the Market Cap increases. Otherwise, how do you balance the equation to keep the Enterprise Value unchanged?


This is not true. Most dividends are priced into the value of the stock because they rarely change.

Go look at a MSFT, PG or any other stocks that pay regular dividends on Google Finance. You'll see their stock is obviously not influenced by the value of the dividend payment at all. It's impossible to tell when dividends are distributed by looking at the stock price change alone.


If you own a stock that pays dividends, you know this to be false. The stock drops exactly by the amount of the dividend on the ex-dividend date. You can identify precisely what that date is if you know the amount of the dividend - the stock chart shows a discontinuity on that date.

A simple thought experiment should make it clear why that is - Let's say a $100 stock has a $2 dividend, if the stock didn't drop by the amount of the dividend on the ex-dividend date, then I could simply purchase the stock, be the owner of record on the ex-dividend date, receive the dividend, and then just sell the stock immediately. I get a 2% return for holding the stock for a week or less. Clearly that doesn't happen.


The price of the stock is influenced by the dividend payment. It might not be obvious in most cases, but look for example at the 3-months chart for Nestle (which pays only once per year): https://www.google.com/finance?q=VTX%3ANESN



Theoretically, yes it should impact the price. In practice, you can't identify when a dividend occurred or how much it was by looking at a stock's price. If there was a strong correlation between dividend payments and stock price, one could algorithmically pick out when a dividend occurred and what it's value was. But you can't because it's hidden in the noise of the market movements.

If what I was saying was false, then the ex-date of the dividend should always close at a lower price than the previous day. However, it's a coin flip as to whether or not the ex date stock price closes above or below the previous day. This suggests that regular dividends are factored into the price of a stock.

You're trying to claim that the ex-date of the stock should close at $previous_close - $dividend every time. But that doesn't happen. When reality and theory disagree, trust reality.


If it didn't drop by the amount of the dividend, then people would be making an awful lot of money purchasing stock a day before the ex-date, being the owner of record, collecting the dividend, and then just selling the stock right away.


Well I just looked through tons of dividend distributions and stock price doesn't drop by the amount of the dividend in like 95% of cases. I don't dispute the theory about why you are right, it absolutely makes sense, but there's a mountain of evidence that it doesn't happen in reality.

For most companies the dividend distribution is less than average daily variance of stock prices. Which is why your strategy won't necessarily yield great results. A 3% yield distributed four times a year is only 0.75% of the stock value.

The SEC also has special rules for extremely large dividends so that the ex-date is after the distribution date.


I don't know how hard did you look, but taking for example the two stocks that you mentioned (MSFT and PG) and the ex-dividend dates since 2007 it's easy to see that there is an effect. The mean return for those dates is -0.5% for MSFT (vs. +0.05% for the market) and -1.0% for PG (vs. +0.1% for the market). Doing a regression of stock returns on market returns you will find that the result is statistically significant (p<0.001). R code follows:

  library(quantmod)
  getSymbols(c("MSFT","PG","SPY"))
  msft.ex=index(quantmod::getDividends("MSFT")["2007::"])
  pg.ex=index(quantmod::getDividends("PG")["2007::"])

  msft.rets=as.data.frame(merge(dailyReturn(MSFT$MSFT.Close)[msft.ex],dailyReturn(SPY$SPY.Close)[msft.ex]))
  colnames(msft.rets)=c("MSFT","SPY")
  msft.fit=lm(MSFT~SPY,msft.rets)
  summary(msft.fit)
  confint(msft.fit)

  pg.rets=as.data.frame(merge(dailyReturn(PG$PG.Close)[pg.ex],dailyReturn(SPY$SPY.Close)[pg.ex]))
  colnames(pg.rets)=c("PG","SPY")
  pg.fit=lm(PG~SPY,pg.rets)
  summary(pg.fit)
  confint(pg.fit)

  par(mfrow=c(1,2))
  plot(msft.rets$SPY,msft.rets$MSFT,xlim=c(-0.08,0.08),ylim=c(-0.08,0.08))
  abline(msft.fit,col="red")
  grid()
  plot(pg.rets$SPY,pg.rets$PG,xlim=c(-0.08,0.08),ylim=c(-0.08,0.08))
  abline(pg.fit,col="red")
  grid()


I stand corrected, thank you.


You are welcome. It was an interesting exercise.


Do you happen to have any good resources for learning R? I've always put it on the back burner but it looks like it has some amazing libraries for extracting data and now I'm keen to look into it more.


I guess it depends on your background and field of interest.

Maybe this helps: http://r4ds.had.co.nz But note it's a blind recommendation, I didn't know about this particular book before.

I found a long list of books here: http://blog.revolutionanalytics.com/2015/11/r-recommended-re...


It's entirely possible that either the stock or market may be volatile, but that's in addition not, instead of, the drop in value resulting from a dividend payout. So, if we have a $100 stock with a 3% yield paid 4x a year, then the stock will drop $0.75 on the ex-date. Let's say, for the sake of argument, that you have some combination of market/stock volatility that moves the stock $4 in either direction. So, in the case of the stock going up $4, on the ex-date, it would go up $3.25. In the case of the stock going down $4, on the ex-date it would go down $4.75.

Yes - it's true that if you are just looking at a stock chart, it might be hard to eyeball the date of the dividend if there is a lot of volatility, but, presuming that volatility is evenly distributed over various stocks dividend dates, there is no way to avoid having the stock drop down by the value of the dividend. I guarantee you there is a pretty large number of investment bankers who have all sorts of models that arbitrage that kind of variance, pretty much eliminating any gap, should it exist for more than a few seconds after opening.

I don't understand how the ex-date could occur after the distribution date. The whole idea behind the ex-date, is that is the date on which the dividend belongs to the seller, not the buyer. I.E. If I buy the stock on (or after) the ex-date, I do not get the dividend, it belongs to the seller. Depending on the exchange, it's usually two business days prior to the date of record set by the board of directors. (At least on the SGX, the exchange I'm familiar with). So how could you place the ex-date after the distribution date? What would the date of record be in that case?

Here is my favorite resource on this topic - http://www.spdrs.com.sg/education/files/SPDRU%20Dividend%20D...


And your point is? the ex div share price recovers in most cases.


Eventually because of profits that go into the next dividend. Otherwise you would just buy each company pre div, sell it a little bit ex div, make tons of free money.


Or, alternatively, if there is no likelihood of future cash flow or profit, each issue of the dividend evaporates a bit more of the stock value, until either dividends are canceled, or the company delists.


It never recovers the value of the dividend. That is permanently gone.


Recovers do the pre-dividend price or to what the price would be had there been no dividend?


> The key fact that the article ignores is that the shareholders collectively own the company. So if they all decline the dividend, they are effectively electing for the company they own to hold the cash (that they own by owning the company).

The other thing that they can do is use the cash for stock buybacks. And it's all (theoretically) equivalent: the company and its cash pile are worth the same amount of money either way.

Of course, questions arise in practice like tax treatment, and the fact that people who own businesses in practice don't want to own as much cash - that's what bank accounts are for, no need to glue them together - or whether companies systematically overpay for stock buybacks because they do it while the company feels prosperous as opposed to times when the stock is affordable.


The Litmus test for that is to check whether the decision of an individual shareholder affects the others. I argue that this is the case. Assume that the shareholders have a preference for cash. If there is only one shareholder, he would clearly opt for the cash dividend, knowing that selling the equivalent amount of shares would adversely affect the market price. However, minority shareholders would probably opt for the shares, each thinking that he could sell the shares without affecting the market much, thereby ending up with 15% more cash in the end. And there is the negative externality: by opting for the shares and selling them, you push down the price a little for everyone, even though it only marginally affects you. So collectively, the shareholders will decide differently than if they were the only shareholder and might end up with less than if they would have chosen the cash dividend. Note that this argument only works when assuming that markets are not efficient, i.e. assuming that selling large quantities of shares affects their price.


Financial theory (a reliable but not foolproof way to look at this) would suggest that if a company you own shares in has too much cash, the owners would hold onto less cash elsewhere.

This theory holds up in terms of maximizing returns, though not in a cash crunch.


Yes. This isn't a game theory paradox if the company is publicly traded.

The one thing I would add is that taxes complicate the calculation if dividends are taxed differently than capital gains.


The shares are basically the a piece of the company. By issuing new shares it automatically depreciates the value of each share, so the company is worth the same but you own a smaller share of the company. You can end up in a grey area between two situations.

1. Everyone takes cash and you get the expected share price

2. Everyone takes shares and the value expected is halved


Issuing dividends also depreciates the value of each share as well. (By exactly the total amount of the dividend / total number of shares.)


I missed that, financials are the same so they should amount for essentially the same value.

Still the dynamics of both are different and usually depreciation of the dividends is factored out on the price of the stock. I wonder if they are pricing the stock just before dividend and if that's fair.


Its just an artifact of the that countrys tax system if you can receive taxed income or scrip shares untaxed then 99.9% of people are going to go for scrip.


> creating a paradox in which everyone gets less by choosing more

This is so misleading.

When the company in not giving $10 of dividend, the whole company has $10 more on its bank account, so it's worth $10 more overall, distributed across all shares. Now if one share (worth $10 at current valuation) is created, all the shares are back to their original value, and if that share is given to a shareholder, he is effectively owning $10 worth more of the company than before. He didn't get less. And if everyone does it (or everyone but one shareholder, or any other combination) everything is still valid.


Well, the point is that paying a stock dividend is equivalent to doing nothing. All that happens is that 1 share turns into for example 1.05 shares. Price per share should go down by ~ 5%, but total market cap stays the same. A rational shareholder should completely indifferent as to whether the company gives out a stock dividend or not.

For a cash dividend that's not true. Something real happens: the company has less cash afterwards (and the shareholder more).

There's a school of thought that says that the value of share should be the discounted sum of all future _cash_ dividends. According to it a company that only does share dividends should be worth nothing.


The dilution does not affect everyone equally. Consider the extreme case of a company with only two outstanding shares and 100$ in assets, so each share trades at 50$. Now, the company emits an extreme dividend of 50$ per share. The first shareholder choses cash andthe second one stocks. Now, the first one ends up with 50$ in cash an 1/3 of a company worth 50$, while the second shareholder ends up owning 2/3 of the firm, which is worth only 33$.


You're missing one important event. In the moment that the dividends are issued (regardless of whether they are stock or cash) a part of the company's value transfers into those dividends.

Your example cannot work because a company worth $100, cannot create new shares worth $100 ($50 per share). (It could theoretically distribute a cash dividend of $50 per share, but then the value of the outstanding shares would be $0).

If it were to distribute say 50% per share. Then it would create two new shares (in addition to the existing two). This would mean the new value per share would be $25.

So investor A has one share worth $25 and a cash dividend of $25 (he owns 1/4 of the company) Investor B has one share worth $25 and one (dividend) share worth $25 (in total 1/2 of the company).


This is also an example of a repeated game, so over time if they maintained their strategies, investor B would own the whole company.

Also depending on how the company operates, there is another element of game theory because the controlling shareholder could elect to cancel all future dividends. if you're the newly minted majority shareholder, it's probably in your favor to do this immediately. In that case, the Nash equilibrium seems to be both parties choosing the stock dividend (and effectively getting nothing).

While the 2 shareholder example is an oversimplification in this example, after enough plays of the game (i.e. dividends) a large shareholder could take control of the company if the other shareholders always choose cash.


They are paying a dividend, a stock dividend in this case. Stock dividends are deemed to be more favourable to the investor because they have now been given the choice of when they want that part of the company to be transformed into cash. Both a cash dividend and a stock dividend dilute the existing shares price by exactly the same amount at the time that a company chooses (as long as they are of the same value of course). In the case of the stock dividend, the investors themselves are not diluted however.

Koninklijke Boskalis Westminster lets its shareholders choose whether they want to receive their yearly dividend in cash or in the form of newly created shares, creating a paradox in which everyone gets less by choosing more.

This is not necessarily true. It depends on the current and future value of the company. If you get a cash dividend now and the value of the company rises in a month, then you've lost out on that upward movement.


Getting a stock dividend is (assuming everyone does get it) a non-event. You had $x in shares of a company valued at $y before the transaction, and you have exactly the same afterwards. The only difference is that you had 1000 shares and now you have 1045. Saying that getting stock dividends is more favourable to the investor that getting cash dividends is equivalent to saying that getting no dividend at all is more favourable than getting a cash dividend.


depends on how you are taxed


If your point is that depending on how you are taxed you might prefer not getting anything than getting a cash dividend, I agree.


By that argument, a 2:1 stock split is equivalent to paying a cash dividend totaling half the company's market cap.


It is, yes, if you mean "stock dividend" rather than "cash dividend". Although I'm not sure about the tax implications.


Yes, I agree that a stock dividend is equivalent to a stock split. But you argued that a stock dividend is also equivalent to a cash dividend. In that case a cash dividend is equivalent to a stock split, which is clearly not the case.

A stock split leaves shareholders with exactly the same share of the company they had before, it's just divided into smaller increments. It also leaves the company's balance sheet exactly the same.

What's actually equivalent to a cash dividend is a stock buyback. That gives each shareholder a larger portion of the company, and removes cash from the balance sheet.

Companies will often do stock buybacks in place of cash dividends. They never do stock splits in place of cash dividends, because splits have no effect on shareholders' wealth.

If a company awards new shares to one specific person, that's different. And you're right, it has the same effect on all the other shareholders as if the company paid that person cash. That person gets more and it comes out of everybody else's pocket. But when everybody gets new shares it's just a split.


> But you argued that a stock dividend is also equivalent to a cash dividend.

They are not equivalent, no. That's what I was trying to emphasize with the difference in choice available to the investor.

> They never do stock splits in place of cash dividends, because splits have no effect on shareholders' wealth.

Neither do cash dividends. You own $100 of a company worth $1000. The company issues a 5% dividend. The company is now worth $950. You now own $95 of the company and got a $5 dividend. Wealth unimpacted (disregarding tax and future changes in the company's valuation of course).


> If you get a cash dividend now and the value of the company rises in a month, then you've lost out on that upward movement.

1. Not if you use the cash dividend to buy more shares.

2. The same thing would happen if you sold the "dividend" shares as soon as you received them.


I agree.


"...Boskalis can pay a dividend, without actually paying a dividend."

That is so very wrong. While the overall picture seems the same, the tangible difference is in what each investor actually has at the end of each transaction:

Option 1: Dividends as cash, which means cash leaving the company. Money is transferred from one entity (the company) to another (a group of shareholders). While shareholders are regarded as owners of the company, the nature of their ownership doesn't always work quite the same as say ownership of one's personal effects. Being a shareholder mostly means having certain rights regarding how one gets part of the company's profits and the right to vote on how the company is controlled. Payout of dividends means an immediate reduction of capital for the company, and an increase of income to the shareholders. So at the end the shareholders have the same number of shares and a certain amount of cash. The market value of their shares may drop at first as a reflection of the dividend payments (because technically the company's book value does drop immediately). But let's be honest here, the whole point of shares is the profit potential, so the pricing of shares needn't be in strict alignment with the book value.

Option 2: Dividends as new shares means the company holds on to capital. At the end, shareholders get more shares, which may suit them just fine if they're not in any situation that compels them to liquidate. Extra shares means having more to sell. Let's not hyper-focus on book value, since a share price needn't be constrained by that. If there's a good chance that the price per share will rise over time, then getting shares may be more profitable to an investor than getting immediate cash.

As the old adage goes, you pays your money you takes your choice. Also, it takes money to make money. But let's not get too hung-up on book value vs. share price, or on whether money truly is a "store of value". There's an awful lot of human desires and human efforts at play here, and in the end it's that interplay of desires and efforts (i.e. what efforts must one undertake to satisfy one's own temporal desires) that brings value to anything.


Right, these moves are not the same. To be the equivalent, the company would need to offer to buy the newly created shares from the investor at a price equal to the value of the dividend (even if that is a premium over market value).

Over a long period of time, Option 2 results in a company with huge cash reserves that aren't generating extra returns (see: apple). This could lead to a situation where the market value of the stock becomes much less than its intrinsic value and a hedge fund (or similar) could acquire a significant holding in the company and compel the board to accept a complete buyout at a discount. Forcing shareholders to accept 20-30% less and leaving them to sue for the difference.

Dividends are the end-game for every company. It doesn't matter if they distribute cash or buy back stock -- eventually they need to put money in the hands of investors.


"...Eventually they need to put money in the hands of investors."

I get your point, and did not mean to oversell "Option 2". But then the shareholders do get to vote on how they'd like it.

BTW, a truer example of "no dividends" is Amazon (http://www.nasdaq.com/symbol/amzn/dividend-history) - Apple does have a history of dividends (http://www.nasdaq.com/symbol/aapl/dividend-history), certainly with some regularity since 2012.


Berkshire is the ultimate example of no dividends, but their growth justifies that. Amazon is probably a decade or more out from a distribution, they just have so much opportunity for reinvestment that it would be foolish for them to distribute dividends. I don't foresee a distribution under Bezos because he won't stop steamrolling markets until he's dead.

Once a company stops expanding at a double-digit pace, it makes sense for them to start paying dividends.


Possibly very naive question but why are dividends paid at all if it's essentially a noop? If they are paid in cash the stock I own is worth less by the same amount and if they are paid in stocks my initial stock is diluted by the same amount.

Do voting and non-voting shares typically receive the same amount of dividends?

The only differences I can see between cash and stock dividends is

1) For cash dividends I pay taxes now, for stock I typically pay upon the sale of said stock.*

2) A company issuing cash dividends has less liquid cash in the bank (also applies to the shareholders who get liquid cash).

*both are taxed as capital gains here, might be different tax wise in other countries which could complicate things


Companies, in general, pay dividends when they have cash that they do not have a productive use for. It doesn't make sense for a company to keep too much cash invested in a low return investment (like a bank account or short term treasuries) so in this case the company gives it back to the owners so that they can use the money more productively.

Interestingly enough this generalization is contradicted by several large US tech companies who have accumulated unprecedented cash hordes. It's interesting to think about why this might be happening.


It's in part because they cannot distribute that money until it's legally owned by the US parent company and that requires paying some additional taxes.


Indeed it is. Also probably because tech is a risky field and companies feel that calls for larger reserves.


Eventually, investors want their money back. For example, if you bought an apartment complex, you'd eventually want to get put a portion of those rents in your bank account right (that's the point of an investment after all)?

The apartment example makes this a little more clear. Your options for extracting wealth are basically, earn a dividend or sell a portion of the holdings. Since only 100% of the company can be sold, you lose value each time you liquidate holdings and eventually you no longer have anything to sell. Dividends can continue as long as the company is earning a profit.

With large companies, the bulk of investors reinvest dividends, so it makes sense for them to have a scheme in place that just grants the shareholder more shares. However, they need to eventually buyback the stock for a stock distribution scheme to be the same as a dividend distribution scheme.


Dividend is cold hard cash in your bank account.

Stocks is not cash and needs to be liquified. Your million dollar portfolio could theoretically be worth $0 any day.


I a reasonably liquid market I could just sell my stocks to get cash. If I don't trust the company to grow I should take the cash dividend but probably also sell all my stock in it (and invest it elsewhere).


So the company issues more and more shares every year. Doesn't that deflate the value of an individual share ? (More shares, but the company still has the same overall net worth.) If so, is it really more interesting for the shareholders to accept new shares, or is there a threshold, or some prisoner's paradox ?

Also, this scheme leads to an exponential increase of shares, aren't there some laws against it ? It seems a bit suspiscious to me.

Complete noob in finance/market rules, don't hesitate to correct me.


Suppose a privately-held company is worth $1.1B, and has 1M shares over 1k shareholders. Each shareholder has a net worth of $1.1M. The company decides to issue a dividend of $100 per share.

If they hand out cash, that means the company is now worth $1B, and each shareholder has $100k more in cash. But their shares are now only worth $1k each, instead of the $1.1k they were worth before. The shareholder's net worth is unchanged.

If they hand out shares, there are now 1.1M shares in the company, and each is worth $1k, the same value per share as with the cash dividend. Each shareholder has an extra 100 shares, and their net worth is still unchanged from before the dividend.

So the key thing is that if they paid the dividend in cash, the overall net worth of the company goes down -- so everything balances out between shares and cash.

Of course, for a publicly-traded company the value of the stock doesn't necessarily match the current net worth of the company, and the share price fluctuates. So you'll need to work out for yourself whether you'd prefer to have the stock (with the capital gains liability) or the dividend (with its tax liability), possibly based on how long you intend to hold the stock.


Thanks, I got it. More cash for the company, and same net worth for shareholders (even more worth if you take taxes into account).

So this would lead to an exponential growth to the number of shares? It really looks like a geometric progression. And, at the end, a huge amount of shares, each worth nothing.


I imagine the hope is that the company keeps growing, so the share price will rise that way.

Also, the company can buy-back shares to keep the number in circulation lower and to increase the stock price, or it can consolidate its shares by merging them, so each shareholder receives one new share for each two old shares.

Lastly, if you're looking at stock charts, the data provider will usually adjust historical values to take into account dividends and splits, giving you an accurate view of what the price would have looked like if the number of shares issued had never changed.


I see. Thanks for the reply!


If the company is doing badly, rational actors will take cash which could hurt the company more at a difficult time. If this has not been accounted/planned for, it could hurt the company.


Yes, stock dividends are effectively the same as stock splits, and both should be no-ops (apart from obscure legal differences). But I don't see the game theory angle. Choosing between cash and stock dividend is equivalent to choosing between stock buyback and no-op. In both cases, I don't see why your choice should depend on what other shareholders choose.


No they are not.

Stock buybacks are effectively same as dividends. If company buys stocks from the market , it increases the value for the shareholders.

https://en.wikipedia.org/wiki/Share_repurchase


Not quite. Buybacks aren't taxed the same as dividends (in the US). As such, they should be worth more than dividends to the shareholder: (all other things being equal, your ownership stake increases from the buyback).


What do stock buybacks have to do with the distinction between stock "dividends" and cash dividends?


Not paying dividends is actually quite common in tech companies https://www.quora.com/Why-do-only-a-few-technology-stocks-pa...


I don't know much about this, but it seems strange. When company issues new shares, it makes existing share owners percentage of the company go down — so shouldn't they have control on when such an operation takes place?


In this case the new shares are distributed to the existing shareholders, so they won't be diluted unless they want (and given that some will opt for the cash, those who don't will end up owning a larger percentage of the company).


Isn't the income from selling any shares also taxed, though?


Yeah but as capital gains I believe, whereas a cash dividend is taxed as income (Income is taxed at a much higher rate than capital gains)


If you have held the stock long enough then dividends can be taxes at the cap gains rate. This is what a "qualified" dividend is.

https://en.wikipedia.org/wiki/Qualified_dividend


That's called a scrip dividend, by the way.


That's the name in Europe, I think. The tax implications vary by country and there are a number of ways that companies can do it. For example, a company can give the option of getting cash while avoiding any actual outflow by giving rights to all the shareholders and selling those rights on behalf of the shareholders who want cash to give them a cash payment instead of the new stocks.




Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | DMCA | Apply to YC | Contact

Search: