Narayanan (2018) describes how stock purchases can play an important role in positive financial outcomes. Narayanan examined why companies like Royal Dutch might choose to pay their shareholders by buying large stock shares while ignoring earnings projections. The ongoing conflict between Iran and the United States has had a negative impact on most oil companies, such as Chevron and Exxon Mobil and Royal Dutch.
The Significance of the Dividend Policy’s Stability
Corporations may use a variety of dividend strategies. One strategy is to pay a consistent dividend. A stable dividend policy (SDP), which is a firm’s standard of practice, provides shareholders with an unaffected or steady payout regardless of market volatility. In essence, dividends are based more on long-term company performance. SDP’s objective is to improve shareholder value. To increase shareholder value, Roya Dutch pays steady dividends. This payout is proportionate to long-term return. Dividends may be paid to shareholders quarterly, semi-annually or annually by companies. A consistent dividend policy ensures that shareholders will be paid dividends every year, as long as the company is financially viable.
Motives to Stock Purchases
Buybacks are a preferred method of capital management. The ultimate goal of management is to maximize shareholder return. Buybacks are often a good way for shareholders to grow their value. Repurchases of shares can be justified for many reasons. Management might believe the stock market has fallen too quickly and that they should repurchase shares. Several factors, including a generally unfavorable economic environment, scandals, and weaker-than-anticipated profits, might cause the market to ruffle stock values. Royal Dutch had lower 2018 profits than expected in 2018. The company saw its 2018 sales rise by 4 percent to $9.24billion but still fell below expectations (Narayanan 2018). If a company is investing millions in stock it could indicate that its management believes the market has oversold their shares. This can be a good sign. One reason corporations might consider buying back shares is to boost their bottom lines, which investors use to evaluate the company’s worth. It is not a good motive. This could be an issue of management if the intention is to reduce shareholder value rather than improve financial conditions.
How Stock Repurchases Impact Financial Metrics
The number of shares outstanding is reduced by share repurchases, which can affect the company’s income statement. Stock repurchases also have an impact on financial accounts. The distributions are not considered costs and do not impact income line items. However, announced profits per shares will still be included in net profit. Following a stock buyback, the firm’s cash and total assets are often decreased because of the funds needed to buy back the shares (Floyd & Skinner, 2015). Important measures like Return on Equity and Return On Investment (ROI), often rise after a share has been repurchased. The amount of stock boughtback is often included in the quarterly earnings report and statement cash flows. Stock buyback is a major factor in determining profitability indicators like EPS.