Dividends and Share Buy Backs
- 01:40
Understand the differences betweens Dividends and Share Buy Backs
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Transcript
We are looking at returning capital to shareholders dividends and share buybacks. Let's start with dividends. Companies will try to maintain a dividend payout ratio, which is calculated by taking their dividend and dividing it by net income. Maintaining a stable payout ratio helps to support the share price. It's important to recognize that although a company may have different share classes with different voting rights, each share will receive an equal dividend. On a specified date. A dividend may be paid in cash or in new shares. If a dividend is paid in cash, the shareholders may wish to reinvest that cash back into the company by buying more shares. Unfortunately, however, that dividend will have income tax implications for the shareholder. So some companies forgo the dividend entirely with a payout ratio of zero. Netflix and Google are great examples of such companies. Now, let's consider share buybacks. We are talking about a company buying back its own stock. This can be purchased in the open market or directly from shareholders. It's another way of returning capital to shareholders. If we issue, say, a hundred million shares and buy back 20 million shares, then we've issued stock of a hundred million treasury stock of 20 million shares outstanding of 80 million. So how do we forecast share buybacks if say, we're building a model? Unfortunately, this is really hard. Buybacks tend to be irregular, and for the selling shareholder, unfortunately, any gain they receive is subject to capital gains tax.