Purpose of Stock Dividends
The purpose of stock divided may be summarized as below :
- To conserve cash – The most important reason for paying a stock dividend is to give the shareholder something on a dividend datc-a share in the growing earning. Yet conserve the cash of the company. If liquidity position does not permit cash outflow
- To lower P – Another objective may be to lower the market price per share, so as to keep it within a desired trading range, because a high price will not appeal to small or average the issue, provide wider market for the shares and broaden ownership of shares.
- To lower D or EPS – A third reason may be to lower dividends and earnings per share, so that the public will not think the company is earning excessive profits and will be perhaps less critical. This is one of the remedies of correcting under capitalization that is characterized by a high rate of earnings on the capital employed.
- To reduce earned Surplus – Some companies also by stock dividends to cut the earned surplus to a relatively modest figure, thus avoiding the possible criticism of earning exorbitant profits or exploiting the consumer public. Moreover, huge accumulated profits often provide temptation for speculation and manipulation in there values. But one these reserves are capitalized, the scope for such activities is reduced.
- To raise the total market value of shares and dividends – If the company maintains the same rate of dividends as before, the shareholders would receive more cash dividends on their holding when ever bonus share issued. Moreover, even the market price per share in reduced by the issue of bonus shares. the fall in price is generally less than proportionate so that the total wealth vis-a vis cash dividends will depend upon the trade off between current divides an retained earnings. which we discussed in detail under optimal dividend on market value : C Austin Barker concluded that despite strong opinion to the country, stock dividend price whether large or small, produce no lasting gains in market price for widely held stock, “because the stock dividend was beneficial only when cash dividend was increased. In any case more often than not, a stock dividend represents firm’s the decision to increase modestly the amount of cash dividends.