Category Archives: Dividend Stocks

Dividend Stocks, Financial Stocks, Investing, Retirement

Financial Education: Stock Dividends vs. Stock Splits

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Every investor has one goal in mine when they are investing in a company – and that is to earn income. Cash dividends may be distributed during some periods due to a company’s success. There are times that companies do not allocate their wealth through cash.

But it is not a clear indication that the company is already failing. Declaring a stock dividend or a stock split are the two corporate strategies that can be used in dealing with different situations.   

What is a Stock Dividend?

Stock dividends are distributed by corporations to their shareholders as payment through additional shares. Shareholders receive stock dividends issued through an additional number of shares of the same kind held by them. The additional dividends come from up to 25 percent of the existing number of shares outstanding.

Therefore, the worth of the market value per share will remain unchanged. Instead of declaring cash dividends, corporations prefer issuing stock dividends as payment for plenty of reasons which will be discussed later on. 

To exemplify the outcome of a stock dividend, let’s presume that a motorcycle manufacturing company obtains 300,000 shares outstanding. The corporation earned $600,000 at the end of the year. If we are going to compute for its earnings per share, you are going to get $2 per share.

The market value per share outstanding is $60. As a result, the price per earnings ratio or the multiple that measures the relativity of the company’s annual net income earned to the market value per share is 30.

Instead of issuing cash dividends, the board of directors decided to distribute 10% stock dividends to give back to its shareholders. The corporation will have 30,000 additional shares (300,000 shares outstanding x 10%).

Thus, a shareholder that owns 30 shares will obtain 2 additional shares. This will affect the earnings per share which decrease to $1.82 and the price per earnings ratio rises to $32.97. Consequently, the shareholder that possesses 30 shares still owns an unaffected total value of $1,800.  

Stock Dividends are classified into two kinds:

  1. Small Stock Dividends: Stock dividends are deemed as small if it is below 20-25% of the total number of shares outstanding before the dividend declaration occurs. 
  2. Large Stock Dividends: Stock dividends are considered large if it is above 20-25% of the total number of shares outstanding before the dividend declaration occurs. 

What is a Stock Split?

A stock split occurs when more than 25% of the dividends are equally distributable to the shareholders.

Just like in stock dividends, dividends are transferred from retained earnings to the capital accounts and the shareholders will maintain the amount of their total market value. The commonly applied stock split is 2-for-1 and 3-for-1. It simply requires corporations to divide a share to 2 or 3 and it will still result in the same total dollar value.

For instance, a pharmaceutical company has 500,000 shares outstanding with $50 per share issued a 30% stock dividend.   The board of directors planned to divide its stocks by 2-for-1. Subsequent to the stock split, the market value per share will be $25 and will increase its number of shares by 500,000. Therefore, a shareholder that has 2,000 shares outstanding will acquire additional 2,000 shares and retains the total value of shares.

Comparison

Companies declare a stock dividend or a stock split to aim for long-term objectives. As a result, the investors will acquire a number of shares higher than the number of shares that they had before the distribution of stock dividends or the occurrence of the stock split. As a company proclaims a stock dividend or a stock split, its investors are anticipating better financial performance because it can now sell its shares for a lower price. 

Justifications for a Stock Dividend or a Stock Split

A company may declare a stock dividend due to its need to fuel its financial growth. These companies appropriated their cash and temporarily distributed stock dividends because they are planning to make new projects or intending to satisfy their debts. However, the declaration of stock dividends may also a sign that a company does not have enough cash. Therefore, it is incapable of issuing cash dividends.

A stock split occurs when companies believe that the market price per share is preventing the investors to capitalize on them. If the market price per share of a company is too high compared to the value of its competitors, potential investors may disregard the company.

Reverse Stock Split

If corporations have the capacity to split up the number of shares outstanding, they can also merge it to a smaller total number and appreciate the value per share.

However, the consolidation of total shares will not affect the total value of shares outstanding. This process is called as a reverse stock split or stock consolidation. If five or ten existing shares of a corporation are merged into one share, it will be named as a 1-for-5 or 1-for-10 reverse stock split. The opposite of this corporate procedure is the stock dividend.

To illustrate this, let’s assume that an e-commerce company obtains 300,000 shares outstanding which trades for $40 per share. The board of directors decided to combine 10 current shares into a new share or a 1-for-10 reverse stock split. As a result, the number of shares outstanding of the corporation will shrink to 30,000 but will raise its market value per share to $400. 

The management suggests the reverse stock split which needs the approval of the shareholders. Even though the corporate value is not affected, this corporate procedure allows companies to deduct the number of shares outstanding due to several reasons.

Companies increase their value per share because of the rules of mutual funds and institutional investors about the minimum price of a stock. A company that is unsuccessful to be qualified for the acquisition of an important investor may impair its good name. 

In addition, companies are merging their total shares to acquire a higher price per share for them to be listed on an exchange. A minimum trading price is one of the listing requirements that must be met by the companies in order for them not to be de-listed. 

 

Dividend Stocks, Investing, Retirement

Income Investing: Alternative Dividend Policies

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Income Investing: Alternative Dividend Policies

In order to survive, companies always find ways to construct plans that will help to maintain their present condition. As these companies make some progress, they continually feel the need to give back to their shareholders in order to preserve their trust while continuing their business operations and pursuing other projects in the future. 

A dividend is a percentage of a company’s retained earnings that are distributed to the shareholders in a form of cash, shares of stock, or property. Every time a company earns largely for a year, the shareholders are being paid back by the company through disbursing dividends as a reward for investing in them.

Most companies pay cash dividends to the shareholders. Even though, the dividends are not distributed periodically. The board of directors decides the right time to pay back to the shareholders and the portion of the retained earnings that shall be appropriated for the dividend distribution. Their dividend decisions are influenced by different factors to consider such as the company’s outstanding debts, liquidity position, inflation, legal restrictions, and earnings stability. 

Dividend policy is the financial strategy that the board employs to build its dividend payout to shareholders. The concerns that are included in the dividend policy are the payment timing and the amount which are based on the long-term capability to earn and on the unappropriated retained earnings. The understanding of shareholders from the dividend policy is essential from the fact that the dividends to be received by them will be coming from the unappropriated retained earnings. 

This article aims to enumerate the year-to-year patterns on how companies construct the structure of their dividend payout and explain the rationale behind these. 

Constant Dividend Payout Ratio

Under this policy, it is specified that a fraction of retained earnings is constantly taken for dividend distribution every year. In short, the constant dividend payout ratio preserves the percentage of retained earnings distributed as dividends to the shareholders annually. Despite the stability of the dividend per earnings ratio, short term earnings’ volatility still affects the dividends. The amount of dividends expectedly varies every year as profits fluctuate. In spite of this, most of the companies do not use this policy. 

Constant dividend payout policy appears to be adaptable to weakening market status as the dividend per share directly changes as the earnings fluctuate. The policy does not manifest any disapproving indication from the fact that the dividend payout ratio is not volatile. As a result, investors can be enticed by the companies that use this policy. 

In this policy, the fairly steady dollar dividend is sustained every period despite the earnings’ volatility.  A specific amount is given per year as dividends which depends on the management. The amount per dividend will not fluctuate unless the board is persuaded by data that an increase in dividend payment will guarantee the maintenance of its value in the future. The dividend per share will not decrease as long as the management can still anticipate the longstanding strength of a current dividend. 

A stable dividend policy indicates a constant normal operation of a company and steadies the market value of shares. In addition, a company’s liquidity position gets better. As a result, it can meet the standards of the investors that are looking for stable dividends. The continuous dividend distribution is advantageous for investors. It strengthens the relationship between the shareholders and the company because the dividends have become a regular source of income. This policy is beneficial for retirement as the stable dividend distribution can be financial support to suffice someone’s daily necessities. 

Even with the advantages of applying a stable dividend payout, companies also face risks that can cause severe damages which explains the refusal of companies on its usage. The companies that frequently pay out dividends without considering their financial standing seem undesirable for potential investors. It will also result in the disposal of shareholders of their stocks.

Small, Regular Dividend Plus Year-End Extra Dividend Payout

Applying this dividend policy will let companies distribute dividends periodically and reward shareholders with year-end additional dividend during their successful times. This policy is different from regular paying dividend policies because extra dividends are announced unexpectedly. Most companies pay out large amounts of cash as an extra dividend that is why the board meticulously assesses the company’s condition to avoid complications in the future.

After evaluating the company’s profits for that year, the extra dividends will be declared at the end of the fiscal year. The reason why companies impose this policy is to prevent the implication of long-lasting dividends. Issuing extra dividends also indicates a good management strategy. Another purpose of paying out extra dividends is to prove to shareholders how successful the company is and that it will maintain its financial health over a long period of time which might result in gaining the confidence and loyalty of the investors for the company.  

The small regular dividend plus year-end extra dividend payout is applicable for cyclical companies that are largely affected by economic fluctuation. The profits of these companies are volatile. Therefore, there are times that dividend distributions are postponed due to losses or capital expenditures from other periods that they are still currently working out. Utilizing this policy has a drawback as well. It is a mistake for the companies to pay out extra dividends to its shareholders while erroneously expecting that they can support their future projects. Investors may perceive it as a bad corporate decision made by the board. 

The company might miss the chance to capitalize on new projects or facilities because it already had paid out extra dividends to the shareholders taken from the company’s cash. On the other hand, companies may seem to be inactive in making new projects because they are distributing extra dividends plus small regular dividends. A company must obtain reinvestment opportunities as well from the fact that growth is also an important concern for investors. 

Some investors do not prefer investing from companies that are exploiting the small regular dividend plus year-end extra dividend payout because of its unpredictability. These companies may look as if they prosper just because of some special incidents and not because of their efforts to stabilize their financial condition.  Companies exert every effort to disburse dividends consistently over the long-term future. Nonetheless, some instances require them to prioritize other aspects. 

Dividend Stocks, Investing

Pros and Cons of Discounted Cash Flow Valuation

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Pros and Cons of Discounted Cash Flow Valuation

Most investors care about one thing when it comes to choosing a company to put their investment: cash. The cash flow of a company is important for investors because it is the basis for the possible amount of money they are going to receive. For that reason, an appropriate approach has to be followed to devise a sensible investment decision. 

Discounted Cash Flow Valuation is a mathematical technique in gauging the appeal of an investment on a company based on its potential cash flows in the future. This evaluation method helps to determine the value of a company today which must be derived from the capability of a company to continuously generate cash stream in the coming years. Analysts exert efforts to construct projections on the financial performance of a company with the aim of weighing up its value. Aside from the individual investments, discounted cash flow valuation scrutinizes the projects that the investors or the company can maneuver. 

The present value of projected future cash flows requires a discount rate for discounted cash flows valuation. The company’s estimated present value is needed in order to thoroughly assess a possible investment. The potential investment could be taken into account once the present value computed using the discounted cash flows analysis is proven to be greater than the cost of the investment today.

The discounted cash flow valuation is advantageous for investors from the fact that the present value of a company can be used for them to estimate the future cash flows that an investment or a project can bring. Investors must consider not only the investment but also the ending value of pieces of equipment and other assets for them to accurately appraise the potential cash flows in performing the discounted cash flow valuation. 

But before you depend on this valuation method, we are going to discuss the advantages and disadvantages of using discounted cash flow valuation. This is for you to determine if this method is appropriate for the company and to assess the extent to which you can rely on this valuation method.

Discounted Cash Flow Advantages:

  • A Practical Instrument to Back Up Value Prices Issued by Analysts

There are a lot of aspects that influence discounted cash flow analysis such as profit margins and future sales growth. The valuation method takes account of the discount rate affected by the risk-free rate of interest. Discounted cash flow analysis regards the company’s cost of capital and potential risks to its share prices as essential steps from this valuation method. For you to estimate the company’s share price precisely, these factors cannot be overlooked because these will give ideas about the different elements that influence a company’s value. 

  • Dependability and Precision

According to corporate finance textbook authors Peter DeMarzo and Jonathan Berk, “the most accurate and reliable” valuation method for constructing a sensible investment decision is by using discounted cash flow analysis to decrease investments to net present value. Although some results on computing using this process are doubtful, there is no existing valuation technique that can be as reliable as the discounted cash flow analysis in assessing the investment which provides the greatest value for the company. 

  • Focuses on a Single Figure

One of the benefits of applying the discounted cash flow model is that it uses a particular value to represent an investment. This valuation method aids to rationally decide upon different investments. If the discounted cash flow model concluded a negative result, the company can have a possibility to incur losses due to the investment; if it leads to a positive outcome, the investment has the capability to bring successful cash inflow and can be considered by the company. The analyst shall forecast the cash flows from the investment, discount it to the present value, combine them all, and systematically weigh them up. The most lucrative choice is the one that has the greatest present value.

  • Reliability on Free Cash Flows

For investors, discounted cash flow analysis is the only valuation method that depends on free cash flows. Free cash flows are the cash of a company gained from its operation, decreased by the cost of expenditures on assets that is why it is a reliable measurement of money allotted to the investors. It is also a good basis of valuation because it disregards the independent accounting policies and manipulation of financial statements related to reported earnings. Free cash flow is essential for the discounted cash flow valuation since it helps to determine the companies that have high open costs that have a probability to impact earnings today but has the capability to escalate earnings eventually. In addition to that, free cash flow exposes the capacity of a company to satisfy its obligations, stabilize its growth, and distribute dividends. 

  • Validation Purposes

The discounted cash flow method is commonly used to easily assess whether the current share price is reasonable or not. As an alternative to approximating the intrinsic value, the current stock price is applied upon the discounted cash flow valuation model. By working in reverse, the valuation model will reveal if the company stock price is overvalued or undervalued. 

  • Business Strategy Construction

Other valuation techniques have limited data that restrain them from being exploited by devising business strategies. Investors can maximize the use of the discounted cash flow model by considering it as one of the bases for significant alterations to the business strategy.

Discounted Cash Flow Disadvantages:

  • Complexity 

The risk in employing the discounted cash flow model is deciding what cash flows to be discounted while the investment is complicated and substantial, or the unfamiliarity of the investors about the future cash flows. This valuation method is important for investors since it is based on cash flows offered for the new shareholders. A weak value is constantly implied when the method is based on the distributed dividends to a small group of shareholders.

  • If Widely Employed 

If the discounted cash flow is used excessively and outside its coverage, it may lead to unreliable presumptions. Continuously fluctuating amounts relevant to the valuation method may nullify the analysis once an investment or a project has commenced.

  • If Relevant Data are Inaccessible

As minority shareholders, they lack information about a company’s cash flows and projects needed to form assumptions for the discounted cash flow valuation since they don’t have any control from it. Therefore, this valuation method will not be beneficial for these investors. 

  • Susceptible to Appraisal Mistakes

The discounted cash flow valuation is a powerful instrument from the fact that it covers a broad range that covers the data for estimation. The model is prone to different kinds of errors. If estimated figures are fallacious, the net present value might be erroneous as well. Therefore, the model is impractical to use since it may cause an investor to form poor investing assessments and decisions. The valuation method is achieved by constructing forecasts. The cash flow of a company is required to be forecasted by an analyst. But that process cannot be attained only by just guessing because the data will be unreliable. The cash flow projection must still be based on significant pieces of evidence. In addition to that, the discount rate on the discounting formula must be estimated. The specific total cash changes periodically have to be presumed in order to get the discounted rate. 

If the discounted cash flow valuation is too complicated for the investors to understand and to maximize as a basis for their investment decisions, the method will not be significant. Hence, alternative techniques have to be utilized. But if you try to study the method with the help of qualified valuation accountants, you can thoroughly scrutinize companies for long-term investing. 

 

Dividend Stocks, Investing, Retirement

Stock Trading Strategy: Appropriation of Retained Earnings

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Stock Trading Strategy: Appropriation of Retained Earnings

After a successful performance of a corporation, the shareholders are expecting to receive something in return from their capital contribution. However, the board of directors will still discuss if it is the right time to distribute the retained earnings through dividends. Some corporations are still facing problems that hinder them to repay their shareholders. But some are just establishing their priorities in order to fuel their expansion. If the board decided not to pay out dividends or will distribute only a part of the profits, a portion of the retained earnings will be appropriated for a specific purpose. These are the commonly created appropriations:

Appropriation for Contingencies

Corporations allocate their retained earnings to reserve their resources if in case they fail on a pending lawsuit which will result in charges to be incurred. The amount of the liability to be charged on a company regarding a lawsuit is uncertain. A corporation that is unprepared for future losses might end up struggling with bigger problems. Therefore, it is a sensible decision for the board of directors to designate a portion of its retained earnings for emergency purposes. 

Appropriation for Plant Expansion

If a corporation has decided to acquire land and build plant facilities, it will surely allocate its retained earnings for such a project. As a project concerning plant expansion continues, a substantial amount of expenses will persist to be incurred to the company as time goes by. Thus, the designation of the retained earnings is reasonable since this is for the benefit of all the shareholders in the future. 

The appropriation for contingencies and plant expansion is called voluntary appropriations because these are established by the board of directors at the same time permitted by the shareholders.

Appropriation for Bonds and Stock Redemption

Retained earnings are often reserved with the intention of guaranteeing the disbursement for the bonds or redemption of the stocks. This retained earnings allocation is also known as contractual appropriation.

Appropriation Reserve for Treasury Shares

If a corporation is planning to reacquire outstanding shares from its shareholders, it will retain its profits instead of giving it out through dividends. Since it is covered by the law, the appropriation is also called as legal appropriations.

For readers to get the point of view of the corporation, an example is cited below:

Company XYZ has obtained retained earnings of $4 million. The board has appropriated an amount of $1.5 million from the retained earnings with the purpose of building plant facilities which the shareholders approved. The journal entry for the appropriation is recorded as follows:

Retained Earnings  1,500,000

   Appropriation for Plant Expansion 1,500,000

The appropriation for plant expansion is still a retained earnings account but it will not be taken for the payment of dividends. As a result, the unappropriated retained earnings worth $2.5 million is the maximum amount available for paying out dividends. 

Once the goal in appropriating the retained earnings has already been achieved, the appropriation can now return as unappropriated retained earnings. As a result, it can be used to distribute dividends or appropriate it again for some other purpose. A journal entry using the foregoing example will be prepared as:

Appropriation for Plant Expansion 1,500,000

    Retained Earnings  1,500,000

Aside from distributing dividends, corporations will not restrict a portion of their retained earnings for the intention of supporting their regular operations. The appropriations will be reflected in the statement of retained earnings in order to maintain the trust of the shareholders since some are skeptical that the appropriated amount might go to the pockets of the board of directors. 

 

Dividend Stocks, Investing, Retirement

Income Investing: The Dividend Distribution Process

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Income Investing: The Dividend Distribution Process

A thriving corporation never forgets to keep on looking back on its stakeholders who contributed to their successful performance. Once they secured their financial position and came upon a decision with respect to the dividend policy, corporations usually pay out dividends to their investors as their way of giving back. This process progresses gradually in order to give time for the deliberation of the Board of Directors and for the shareholders’ documentation. 

We are going to tackle the dividend payment procedures, the essential dividend dates that must be considered, and who is entitled to claim the dividend payments. To be included here are the accounting journal entries in order to present the corporate perspective to every dividend payment stage. This article will be beneficial especially for the investors that are just starting out. 

Date of Declaration

This is the date on which the dividend payment is formally confirmed and announced by the Board of Directors. The board has finally decided what type of dividend will be distributed, the dividend size, and the date of payment. This date is also known as the “announcement date”. This is a date of which option holders must let the corporation know if they want to use their right to the option. During this date, the liability to pay out dividends to the shareholders is acknowledged on the books using this journal entry:

Retained Earnings     xxx

     Dividend Payable     xxx

In this journal entry, we debited retained earnings since the dividend to be paid out will be taken from the profit appropriated by the corporation. Dividend payable has been credited because of the corporation’s liability from its shareholders. 

Date of Record

During the date of record, the corporation indicates the shareholders who will be eligible for the dividend payment. The stock and transfer books are to be closed on this date only to complete the shareholder list for the entitlement of the subsequent dividend payment. Therefore, a journal entry for this date is not necessary. In order to use as a source in indicating the eligibility of the shareholders for the dividend payment, a fixed date must be set since stocks are effortlessly transferable.

Ex-Dividend Date

This is a time on which the right of ownership to the dividends is homogeneously dismissed by the stock brokerage four days before the date of record. It is done in order to prevent the recording of the eligible shareholders last-minute prior to the date of record. Thus, stocks transferred subsequent to the ex-dividend date will be automatically listed out from the list of shareholders entitled to the dividend payment. There is also no required journal entry for this date. 

Date of Distribution

This is a date of which shareholders will receive the dividend payment. If a cash dividend is distributed, the corporation will mail the dividend check to every eligible shareholder. This date is also called as “Payment Date”. The journal entry to be recorded for the dividend payment will be:

Dividend Payable     xxx

   Cash, Property, or Share Capital  xxx

Since the liability has been satisfied, the dividend payable is debited. While cash, property, or share capital is credited due to the distribution of the dividends. 

In order to further elaborate the dividend payment process, an example is provided below:

The board of Bank of America Corp. has formally declared dividends worth $0.18 on a quarterly basis last October 22, 2019. It has been announced that the corporation has completed the list of shareholders eligible for dividends last December 6, 2019.  To finalize the qualified shareholder list on the date of record, the ex-dividend is set on December 5, 2019. At last, Bank of America Corp. will issue dividends to the qualified shareholders on December 27, 2019. The dates are illustrated below:

Date of Declaration: October 22, 2019

Date of Record: December 6, 2019

Ex-dividend Date: December 5, 2019

Date of Distribution: December 27, 2019

 

Dividend Stocks, Investing, Options

What’s The Difference Between Cash Dividends And Stock Dividends?

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What Are The Differences Between Cash Dividends And Stock Dividends?

A dividend is the distributed profit by a corporation to its shareholders. This is how corporations give back to their investors as they contributed capital to its successful performance, and maintain a good rapport between them. Periodically, a corporation pays dividends with an amount that depends on each shareholder’s investment to the company. The decision in allocating a portion of retained earnings is developed by the Board of Trustees. The management shall agree to a decision if there must be an appropriated budget for the dividend payment or what kind of dividends shall be distributed.

Most corporations usually issue two types of dividends: cash dividends and stock dividends. Therefore, investors must familiarize themselves with these types of dividends because they will surely encounter both in the future. In this article, we are going to specify the distinctions on every aspect of these dividends in order to bring awareness of why corporations pay a particular dividend. Consequently, this will eventually help you utilize the knowledge to your advantage towards a successful investment experience.

What are Cash Dividends and Stock Dividends?

A cash dividend is a regular payment in the form of money taken from the retained earnings of the company. Normally, cash dividends are distributed quarterly after prioritizing the payment for the company’s outstanding debts. 

A stock dividend, which is also called as scrip dividend, is an allocation of a company’s additional shares originating from unissued shares. This type of dividend is being distributed instead of paying cash dividends to the shareholders if the company’s liquidity is low. Companies distribute stock dividends in order to repay their shareholders without spending cash. Therefore, companies are able to retain their assets and appropriate them for expansion purposes. 

Stock Market Calculations

The amount of cash dividend to be given on a shareholder is different from another shareholder depending on their number of shares since it is issued on a per-share basis. For example, if the Board of Directors declared $20 per share, an investor that owns 10,000 shares will receive $200,000 worth of cash dividend. Even if the cash dividend is stated at a specific percentage, the result will always be the same. Let’s say 10% is issued as a dividend on a $200 par value per share. The investor on the preceding example will still get the same amount of $200,000. 

The amount of cash dividend that investors will periodically acquire depends on how many times the company will issue annually. Using the previous example, the company pays cash dividends quarterly. Therefore, shareholders will receive $5 per share every 3 months. 

With the allocation of stock dividends, the retained earnings are being capitalized while shareholder’s equity stays unchanged before and after its declaration and distribution. The allotment of the stock dividend only expands the number of shares but does not affect the benefits nor the ownership of its shareholders. For instance, a corporation that has 300,000 shares declares a 20% stock dividend. As a result, a shareholder that possesses 3,000 shares from that corporation will gain 600 more shares. The shareholder that owns 10% from the shareholder’s equity will maintain its portion from it after earning a 20% stock dividend and the market price of the stock remains the same. 

A small stock dividend considers the distribution of additional shares of less than 25% chargeable to retained earnings at the market value. While the additional share of 25% is considered as a large stock dividend that must be charged at the par value. 

Advantages of Cash and Stock Dividend Acquisitions

Obtaining cash dividends will benefit investors whose goal is to earn cash regularly. Cash dividend-paying companies are obliged to pay cash to their shareholders regardless of the companies’ financial status. Therefore, investors must carefully pick the cash-dividend paying companies to invest in for them to ensure a permanent source of passive income. 

Through cash dividend, investors are also given the freedom not only to spend it for personal use, but they can also buy more shares from the same company and buy shares to another company concurrently. Shareholders who are willing to reinvest their cash dividend must undergo on a dividend reinvestment plan. Buying more shares is a wise way to earn more money in the future if you believe that the company and economy have the potential to grow. 

The advantage of gaining stock dividends instead of the cash dividend is that investors will not incur tax from its acquisition. However, receiving a stock dividend with a cash dividend option included is subject to tax. Investors can sell their stock dividends in exchange for cash. Due to the sale of the stock dividend, it will not be exempted from tax anymore.

Disadvantages of Cash and Stock Dividend Acquisitions

The liabilities of a company increase because it is paying out cash dividends to its shareholders. The companies that distribute cash dividends may either have enough cash flow to support its growth or just feel obliged to give back to its shareholders in order to gain their trust. If a company still pays out cash dividends while still having losses and outstanding debt, that’s already a sign of its financial instability. Instead of distributing cash dividends, companies could have allocated their cash for expansion purposes which may result in market price appreciation. Aside from that, the cash dividends earned by shareholders are subject to tax based on the amount received. 

Stock dividends don’t have any value for investors who are expecting cash from the company they capitalized on. For that reason, they are pressured to sell it even for an amount lower than the dividend’s market price. In addition to that, shareholders will incur costs and taxes from selling their stock dividends. 

Reasons Companies Issue Dividends

Cash dividends are issued by companies because they already obtained ample earnings. It is predicted that giving back to their shareholders will not affect long-term financial strength. These cash-dividend paying companies pay out cash because they might have a good financial position but has a limited capability to venture on expansion to spend their cash up.  Companies tend to issue stock dividends to their shareholders when it is not yet the right time to exhaust assets just to repay shareholders. These stock-dividend paying companies are just taking safety measures because they don’t want to inflict any harm to their liquidity.

 

Dividend Stocks, Investing

How to Apply Financial Ratios When Buying or Selling Stock

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How to Apply Financial Ratios When Buying or Selling Stock

Buying shares of stocks for your financial security is a good start to suffice your future needs. However, doing so without ensuring the reliability of a particular corporation you want to capitalize on will only jeopardize your investment. It is true that there will be numerous risks to be encountered in investing in stocks. Though, we can still manage to minimize these risks to occur. 

Before venturing your money on stocks, it is absolutely necessary for investors to evaluate the financial performance of every possible corporation they have on their list.  To aid you with that, there are significant and beneficial details that must be considered for you to determine if a corporation is worth investing in. Here are the most helpful financial ratios in evaluating stocks: 

Return on Equity

ROE determines the profitability of exploiting the invested capital. It also verifies the efficiency of the company using the owner’s equity. The return on equity is computed as: 

ROE= Net Income less Preferred Stock Dividend Requirement / Issued and Subscribed Ordinary Shares plus Retained Earnings

This formula indicates how much of the net income will each dollar of shareholder’s equity can gain. To explain it further, let’s assume the following:

 

Ordinary shares, $20 par, 10,000 issued                  $ 200,000

6% Preference Shares, $10 par, 5,000 issued                 50,000

Subscribed Ordinary Shares, 3,275                                  131,000

Net Income – yearend                                                            72,000

Retained Earnings, Unrestricted                                        30,000

Preferred Stock Dividend Requirement                              3,000

 

In order to indicate the profitability using these data, return on equity has to be calculated this way:

ROE= $72,000-$3,000 / $200,000+$131,000+$30,000+ $72,000-$3,000

         =16%

 Take note that retained earnings include net income less preferred stock dividend requirement. From the example, we can say that the company is spending the invested capital successfully as 15-20% ROE is deemed excellent.  Longstanding low ROE denotes the failure of an enterprise to maximize profit. Exceedingly high ROE can be good sometimes since it reflects a successful performance. On the other hand, a high ROE may imply a large amount of debts. Additionally, comparing the ROE of a company to the average ROE of the industry is also a helpful way of evaluating its profitability. 

Earnings Per Share (EPS)

Out of all the information concerned with stocks assessment, this is the most vital profitability ratio that all investors should be focusing on as EPS determines the amount of profit which every single ordinary share can obtain. It is computed as:

EPS= Net Income less Preferred Stock Dividend Requirement / Number of Common Shares Outstanding

Using the foregoing example, here is an illustration on how to apply this formula:

EPS= $72,000-$3,000 / 10,000 shares

        =$6.9 per share

Some companies don’t have preferred shares. If a company has only one class of share capital, a different formula has to be used in order to get its EPS:

EPS= Net Income / Number of Shares Outstanding

A high EPS implies that a company is able to return more than the previous investment of its shareholders. Especially if it’s on a steady upward inclination, potential investors will surely be attracted to availing its shares. Usually, the EPS of a company is weighed against the other companies within the same industry. This would indicate if the company is performing well in comparison to its peers. However, some corporations have a low EPS not because its financial performance is terrible. Its profit might be allocated for reinvestments in order to keep the company progress. Therefore, EPS must not be the only basis in measuring profitability since there are a lot of related factors to be considered. 

Dividend Payout Ratio

Aside from determining the profitability of a company, shareholders are interested in knowing how much dividend they obtained from the earnings. Using this ratio, the percentage of earnings that have been distributed as dividend and the percentage of reinvestment will be revealed. If you are going to rely on the amount per share, it will be calculated as: 

Dividend Payout Ratio= Dividend per Share / Earnings per Share

On the other hand, apply this formula if the only given data is the retention ratio which indicates the portion of the earnings to be plowed back to the company:

Dividend Payout Ratio=1-Retention Ratio

The average S&P 500 dividend payout ratio is approximately 35%. An extremely high dividend payout ratio is considered good as the company is willing to pay out high-priced dividends. But some risks are linked with a high percentage because the company might not be thinking about expanding its operations or not even allocating its profit for future needs. A dividend payout ratio with more than 100% means that the company is distributing more dividends than it is earning. This will possibly result in the postponement of paying out dividends in the upcoming years. These factors have to be considered if investors are planning to acquire a long-term investment.

Small-scale companies that are still starting out normally have a low or 0% dividend payout ratio since their earnings are directly appropriated to a specific purpose such as strengthening financial growth and supporting expansion.

Price-Earnings Ratio (PE Ratio)

Potential investors must not only be interested in how much the company earns. They must also be aware of how willing investors are in obtaining shares. P/E ratio measures the association between the market price and the earnings per share. At times, the P/E ratio is called price multiple because it reveals the extent of how much investors are expected to pay for every dollar of earnings. It must be computed as:

Price-Earnings Ratio= Market Price per Share / Earnings per Share

Even though a high P/E ratio shows how attracted investors are in acquiring shares just because price escalation is anticipated to occur in the future, it could also mean that the market price is overvalued. Companies that acquired losses will result in having a negative P/E ratio and will be expressed as N/A. 

Financial ratios are calculations using numerical figures that originated from financial statements. Being equipped with these fundamental tools is an advantage in indicating if a company performs well. If these are interpreted and utilized correctly, you will be able to derive decisions in avoiding investment risks. 

 

Dividend Stocks

5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

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5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

As an investor, your goal in capitalizing on a trusted corporation is either to earn income from your dividends or to receive an amount of capital gains that exceed your investment. The corporation that you may have chosen has previously presented impressive performance and has been regularly paying dividends to its shareholders.

Despite the positive operation of the corporation, a time will come that it will suddenly take a break in distributing dividends. But there is nothing to worry about because it does not automatically indicate bankruptcy as there are explanations behind this occurrence. Dividend policies have a great impact on the management’s decision regarding the payment of dividends.  Investors should remember these general considerations influencing dividend market strategies:

1. Legal Limitations

Although there is no specific law that obligates firms to disseminate dividends to its shareholders, circumstances must be met concerning the dividends allocation system as imposed by law. Firms’ decisions regarding dividends are affected by these statutory restrictions:

  • Insolvency rule

If the company’s total liability has surpassed its total assets, then it signifies incapacity to pay dividends from the fact that it reflects financial insolvency.

  • Net Profit rule

Companies are allowed to distribute dividends if it earns a net profit. On the other hand, if companies incurred losses, shareholders have to wait for the companies to recover from their losses in order to receive their dividends. 

  • Dividend surpasses profit

Companies may not distribute payments if their dividend is greater than retained earnings.  If the amount of dividend exceeds its profit, it only indicates that the company is paying out too much of its dividends but does not earn or retain profit to power its growth.

  • Capital Impairment rule

The creditors’ rights must also be protected. Therefore, companies are forbidden to pay out dividends if it is taken from its capital invested in the firm.  Aside from the limitations provided by law, certain restrictions are urged by investors to the companies in order to take precautions such as requiring them to preserve a certain amount of working capital and to declare dividends subsequent in repaying debts.

2. Firm’s liquidity position

There is a misconception that a firm’s outstanding amount of profits implies its sufficiency in disbursing cash dividends to shareholders. We have to take note that cash adequacy is unconnected to retained earnings. Firms can earn profits well but can also be lacking with cash from the fact that it might be prioritizing the settlement of its debts or recapitalized its cash in the company. Dividends may not be paid if not held in cash that is why dividend payout is influenced by the company’s liquidity position. 

3. Certainty of earnings

If companies have volatile earnings, they cannot depend on internally generated funds in order to support their financial stability.  This occurrence will definitely affect the administration’s decision on whether to focus on satisfying the necessities of the company or paying dividends.

4. Deficiency in alternative financial sources

Small-scale companies tend to have a lower dividend payout ratio due to their inability to get access to capital markets. These companies that are still starting out prefer saving their generated profit as an investment rather than paying dividends. 

5. Tax in dividend income

Shareholders have a personal preference when it comes to receiving cash dividends due to the tax bracket. The tax to be incurred in receiving capital gains is much more inexpensive than in dividend income. Therefore, shareholders who have a high personal tax bracket would rather have capital gains. In addition to that, the higher cash dividend is subject to a higher tax to be paid which also affects shareholders’ decisions.

These are just the common factors that greatly affect the management in settling decisions concerning the distribution of dividends. As you devote yourself further to exploring your chosen corporation, you can also uncover the other details about its dividend policy.  

 

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Dividend Stocks, Energy Stocks, Stock Markets

What’s Behind Recent General Electric Stock Price Action?

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What’s Behind Recent General Electric Stock Price Action?

General Electric GE stock represents the shares of the General Electric Company. The General Electric Company is an American multinational with diversified interests in technology and financial services. As of 2018, the company operations spread across the aviation, renewable energy, finance, and lighting industries. General Electric products range from aircraft engines, domestic appliances, and medical imagining equipment. 

GE Stock Price History

 On November 12, 2019, the General Electric stock’s closing price is $ 11.42. Notable price levels of the GE stock are as indicated.

  • The record high price was 60.00, the Stock closing price on August 28, 2000.
  • GE’s last 12 months’ high price is 11.75, which is 2.9% above the current share price.
  • GE’s last 12 months low price is 6.60, which is 41.7% below the current share price.
  • The average gas price for the last 52 weeks is 9.36.

Rise and Fall of General Electric Company 

General Electric is one of the 12 companies that composed the Dow Jones Industrial Average. It joined in 1986, and its membership lasted for 122 years. After world war 11, GE became a giant manufacturing company in the US. Its product range was everything from household appliances to military equipment. GE diversified into other industries, including plastics and computing. After Acquiring NBC television network in 1986, GE became a major player in the entertainment industry. The company reached its peak in August 2000, with a market capitalization of $594.

The years between 2001 and 2017, were harsh to General Electric. The company navigated September 11, 2001, terrorists attracts that threatened its airline business. In the same period, the company acquired several enterprises that did not perform as expected. The 2008 financial crises hit the company hard. It’s stock prices depreciated by 42 percent, forcing the company to rethink its operating strategy. GE had to sell some of its money-making ventures such as NBC Universal and GE Plastics to focus on its core functions of manufacturing.

The company slashed its dividend for the first time in 2009 and further in 2010. In June 2018, the GE stock got removed from Dow Jones Industrial Average. In November of the same year, GE share price fell to below $9, the lowest since the 2008 financial crisis.

General Electric Resurgence Attempts

 In a bid to prevent total collapse, GE named its first outsider CEO in 127 years on October 1, 2018. The stock spiked to a high of $ 13.08 within days. The new CEO has moved fast to slash the company’s rising debts. He has sped up GE’s separation from oil and gas giant Baker Hughes. The CEO has reviewed dividends downwards as well as offloading the BioPharma business. 

The new CEO holds high regard in Wall Street. Despite this, the GE stock has lost 24 percent in value since he took over. Analyst predicts the share would be trading at $4 if GE had a CEO with inferior ratings. The China-US trade wars are making the company situation more challenging. The aviation sector has been the best performing division of the company. With the grounding of the Max 737 due to safety concerns, GE cash flows will be lower by around $300 per quarter. 

GE Future Price Outlook 

The stock has lost 69 percent of value in the last three years. Few investors are buying the GE stock. The CEO expects the company’s industrial businesses to have cash outflows in 2019. Forecast for 2020 is positive cash flows and acceleration in 2021. Should the cash flow growth proceed beyond, 2021, then GE is a good value currently.

Conclusion

General Electric has had its glorious days. Analysts still believe that the company has better days ahead. The market has high confidence in the current CEO. Time will tell whether General Electric can turn its fortunes around. However, the majority of the analyst community still seems to be neutral on the stock.

 

 

Dividend Stocks, Financial Stocks

BAC: Bank of America Trades Near Inflection Point

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BAC: Bank of America Trades Near Inflection Point

Throughout nine months which has been brought to an end on 30 September, Bank of America (BAC) has generated net income by 162.16% to $7.17B. The net income has increased by 6.43% to $7.18B. On top of all of that, the company has $184.86B worth of cash and due from banks, 8 times higher than from the cash & due from banks of its no.1 competitor which is J.P. Morgan Chase & Co (JPM).

Bank of America is with Wells Fargo having the better current ratio and quick ratio among the top four money center banks as compared to J.P. Morgan Chase and Citigroup. The current ratio and quick ratio of the company evidently manifested the firm capability of the company to shoulder all their debts. As having total assets of $2,338.83B and the current ratio of 11.82, the company will surely be secured from its debts to the upcoming quarters.

In addition to that, Bank of America has achieved a gearing ratio of 1.59. Therefore, the firm’s management will be funded by the equity capital against the creditor financing and highly leveraged because it is higher than 50%.

Key financials

The target price/current last sale’s percent of the target price is $ 52 / 208%, which means the firm had achieved as twice as its aim price as well as it also endured its competitors to this point. The company’s earnings per share have an amount of $8.07.

This is a clear manifestation of the company’s strong profitability which will continue in the future due to their effective operation. Furthermore, we can say that investors can expect to earn more because the price-earnings ratio is $13.43.

 Bank of AmericaJPMorgan Chase Wells FargoCitigroup
Total Cash & Due from Banks184.86B23.23B18.79B25.727B
Total Debt417.35B516.37B326.77B444.93B
Other Earning Asset972.52B105.45B 779.231B1057.52B
Debt to Equity 159.20%199.40%164.42%225.85%
Total Short-Term Debt 200.64B 246.24B105.45B209.68B
Current Port. of LT Debt/Capital Leases 4.88B –––
Total Long-Term Debt211.84B270.12B221.32B235.26B
Current Ratio(Industry)11.820.6911.821.69
Quick Ratio(Industry)11.771.6911.770.69
Return on Equity 9.73%12.84%10.39%8.46%
Debt Ratio 0.890.900.890.90
Working Capital262.16B258.96B198.741197B
Return of Asset1.10%1.22%1.29%0.92%

The 28 forecasters proposing 12-month price forecasts for Bank of America Corp have a median target of 34.75, with a high approximation of 40.00 and a low estimate of $28.00. The median estimate shows a +24.60% growth from the previous price of $27.89.

The recent consent from 30 polled investment forecasters is to buy stock in Bank of America Corp. This assessment has held steady since October when it was unaltered from a buy rating.

Biggest Quarterly Profit in Bank of America’s History

Bank of America has made everyone in awe once more as it pulled out a profit worth $6.9 Billion after 3 quarters of 2018, as it had overcome its personal best attained during 2011.

After compensating $1.5 Billion to President Trump as income tax which is 26% earlier, the company has still envisioned its upcoming success. The company has been advantageous with the law reforms regarding taxes from the rate of 30% plummeted down to 26%. As a result, it has become exultant with the pretax income risen up to 15% whereas revenues up to 4%.

Technological Investment of $500 Million for Innovation and Sales

As Bank of America shut down its branches to different locations and closed its doors to its employees, it has still found and developed ways to reach out for its beloved customers as it enhances the services through technological advancement. Bank of America proposed to open over 500 new US bank branches in the next four years which will cover 88% GDP. Modifications in terms of technology and interior aesthetics will happen with over 1,500 branches and 5,400 certified financial planners will aid the support in the long run.

Final verdict

As the Bank of America has exceeded the expectations by boosting 9% rise in its consumer loan business, reported fourth-quarter earnings of 2017, the corporation could not be contented with the positive response. Even though the year has been good to Bank of America, we could still give them an affirmative assessment and rate “buy” as well.