The fall in the number of listed companies that pay periodic dividends is indeed because of increasingly using share repurchases to return cash to shareholders. Major companies compensate their shareholders using regular increases in dividends and frequent share repurchase. Share repurchases, nevertheless, have various adverse effects on the company (Almeida, Fos, & Kronlund, 2016). For example, share repurchases significantly affect the income statement of the company by reducing its outstanding share. It also affects the company’s balance sheet by reducing the cash holding of the company, which in turn reduces the company's total asset base by an equivalent amount of money expended in the repurchase (Almeida et al., 2016). Other factors, such as the disappearance of dividends, also contribute to the decrease in the proportion of listed companies that pay regular dividends.
Various types of dividend models make up the dividend policy of a company. Observing the company's long term earnings determines the estimated level of the dividend payouts (Brav, Graham, Harvey & Michaely, 2005, p.520). According to the stable dividend policy, the company aims for an annual steady dividend payout. Under this policy, the volatility of the short term incomes will not be reflected in the payouts. In turn, this hidden reflection makes shareholders unaware of future dividends levels.
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There is a possibility of dividends rising during periods where the company is experiencing minimal earnings. Moreover, the profits may not increase as the same high rates of earning in the thriving years due to the shifting characteristics of publicly traded firms that significantly contribute to low profits. Certain types of features evident in publicly traded firms that evade paying dividends involve shifting their focus towards small firms that have significant growth opportunities accompanied by low profitability (Fatemi & Bildik, 2012, p. 665). The common presumption is that capital gains are more valuable than dividends as the capital gains are taxed at a lower rate than the profits, thus making it an enigma. The three characteristics notorious for affecting the decision on whether to pay dividends include; investment opportunities, profitability, and size. The most liable firms to paying the dividends are the larger firms and the more profitable firms (Fatemi & Bildik, 2012, p.667). Investors are also willing to comply with the shares of the small and equivalently unprofitable companies due to the decline in the perceived benefits of dividends.
Some major companies tend to find share repurchases as the right way of returning money to investors. The decision to participate in share repurchases, however, ends up deteriorating the long term prospects of the company (Almeida et al., 2016, p.177). An increase in the earnings per share prompts repurchases to decrease the company's percentage of employment. In general, the effects of share repurchases influence the mean capital expenditure and the numbers of employees in the company since most companies are willing to exchange investment and jobs for stock repurchases. Additionally, the buyback minimizes impartiality on the side of liabilities with an equivalent amount (Almeida et al., 2016, p.183).
Share repurchases are effective ways of increasing shareholder wealth over time, even though they contribute to the decrease in the number of listed companies that pay regular dividends. The disappearance of dividends also contributed to this fall. Observing the company's long term earnings determines the estimated level of the dividend payouts. The disappearance of dividends and the effects of share repurchases affect the dividend payouts. Besides, while share repurchases build the net worth of investors over time, they are more uncertain than dividend payouts as the value of the repurchase relies on the future price of the stock.
References
Almeida, H., Fos, V. and Kronlund, M., 2016. The real effects of share repurchases. Journal of Financial Economics , 119 (1), pp.168-185.
Brav, A., Graham, J.R., Harvey, C.R. and Michaely, R., 2005. Payout policy in the 21st century. Journal of financial economics , 77 (3), pp.483-527.
Fatemi, A. and Bildik, R., 2012. Yes, dividends are disappearing: Worldwide evidence. Journal of Banking & Finance , 36 (3), pp.662-677.
