Syllabus A. Role Of The Senior Financial Adviser A6. Dividend policy in multinationals and transfer pricing

A6a. Alternatives to a cash dividend 3 / 5

Syllabus A6a)

Determine a corporation’s dividend capacity and its policy given:

ii) The impact of capital reconstruction programmes such as share repurchase agreements and new capital issues on free cash flow to equity.

These methods include:

Shareholder perks

Some companies (e.g. hotels) offer discounts to shareholders on room bookings and restaurant meals. 

A number of transport companies offer reductions in fares. 

Some retailers provide discount vouchers, which are sent to shareholders at the same time as the annual report and accounts.

Scrip dividends

When the directors of a company consider that they must pay a certain level of dividend, but would really prefer to retain funds within the business, they can introduce a scrip dividend scheme.

A scrip dividend enables the shareholders to choose whether to receive a cash dividend or shares.

Share repurchases

Companies with cash surpluses may choose to introduce a share buy-back scheme, whereby the company’s shares are purchased at the company’s instructions on the open market.

Benefit of a share buyback scheme

  1. It helps to control transaction costs and manage tax liabilities

  2. With the share buyback scheme, the shareholders can choose whether or not to sell their shares back to the company.

  3. Share buybacks are normally viewed as positive signals by markets and may result in an even higher share price.

  4. Increasing future EPS (because of the reduction in the number of shares in issue)

  5. Changing the gearing level of the company

  6. Reducing the likelihood of a takeover

Timing of dividend payments

a subsidiary may pay dividends to a parent company in a way that they benefit from expected movements in exchange rates

  • A company would like to collect early (lead) payments from currencies vulnerable to depreciation

  • A company would like to collect late (lag) from currencies which are expected to appreciate