Stock dividends

Definition

Stock dividends are distributions of additional shares of a company’s stock to its existing shareholders, typically issued as a percentage of the shares already owned. This method allows companies to reward their shareholders without depleting cash reserves, while also increasing the number of outstanding shares in the market. Stock dividends can impact both the company’s financial statements and the shareholders’ equity.

5 Must Know Facts For Your Next Test

1. When stock dividends are declared, retained earnings decrease while paid-in capital increases, reflecting the distribution of additional shares.
2. The total market value of the company remains unchanged after a stock dividend; however, the price per share adjusts based on the increased number of shares.
3. Stock dividends can be expressed as either a small percentage (often referred to as a 'small stock dividend') or more substantial amounts ('large stock dividend'), affecting accounting treatment.
4. Earnings per share (EPS) calculations will change following stock dividends because the number of shares outstanding increases, potentially diluting EPS.
5. Companies often use stock dividends to signal financial health and stability, showing they can afford to distribute value without needing cash.

Review Questions

• How do stock dividends affect a company's financial statements, particularly in relation to retained earnings and paid-in capital?
  • When a company declares stock dividends, it reduces retained earnings by the fair value of the shares issued and increases paid-in capital by the same amount. This reallocation doesn't impact total equity but changes how it is distributed among different accounts. Understanding this effect is essential for analyzing a company's financial health and how it manages shareholder equity.
• Discuss the implications of issuing stock dividends on earnings per share and investor perceptions of company performance.
  • Issuing stock dividends increases the number of shares outstanding, which can dilute earnings per share (EPS). While EPS may decrease due to more shares being in circulation, investors might view stock dividends positively as a sign of confidence in future growth and stability. This can enhance investor sentiment even if short-term EPS metrics appear lower.
• Evaluate how stock dividends compare to cash dividends in terms of their impact on shareholder value and corporate strategy.
  • Stock dividends and cash dividends both aim to reward shareholders but differ significantly in execution and implications. Stock dividends allow companies to preserve cash while still providing value to shareholders, potentially indicating a strategic focus on growth and reinvestment. In contrast, cash dividends provide immediate liquidity to investors but may indicate that the company has less need for cash reinvestment. Evaluating these options reflects not just on financial health but also on management’s long-term vision for shareholder engagement.

Related terms

cash dividends: Cash dividends are payments made by a corporation to its shareholders in cash, usually derived from the company's earnings.

retained earnings: Retained earnings are the accumulated profits that a company has reinvested in itself rather than distributed to shareholders as dividends.

stock splits: Stock splits involve increasing the number of shares outstanding by issuing more shares to current shareholders, effectively reducing the price per share without changing the overall value.