Large stock dividends

Definition

Large stock dividends are distributions of additional shares to existing shareholders, typically issued when a company gives more than 20-25% of its existing shares as dividends. This type of dividend often leads to a reduction in the par value of the stock and is used by companies to increase the number of shares outstanding while retaining cash. Unlike cash or small stock dividends, large stock dividends do not impact the company’s total equity but change the per-share value, as more shares are distributed among existing shareholders.

5 Must Know Facts For Your Next Test

1. Large stock dividends are often issued to improve liquidity in the market by increasing the number of shares available for trading.
2. When a large stock dividend is declared, retained earnings decrease because a portion of retained earnings is transferred to paid-in capital.
3. The market price per share typically decreases after a large stock dividend due to an increase in total shares outstanding.
4. Large stock dividends do not result in immediate cash flow for shareholders, as they receive additional shares instead of cash payouts.
5. This type of dividend can signal a company’s strong performance and confidence in future growth, encouraging shareholder retention.

Review Questions

• How do large stock dividends impact the overall financial statements of a company compared to cash dividends?
  • Large stock dividends primarily affect the balance sheet by reallocating amounts from retained earnings to paid-in capital, while total equity remains unchanged. In contrast, cash dividends reduce both cash assets and retained earnings. This means that while both types of dividends are benefits to shareholders, large stock dividends don't deplete company resources like cash does, which can be crucial for funding future operations or investments.
• Evaluate how large stock dividends influence investor perceptions and market behavior in relation to a company's growth prospects.
  • Large stock dividends can positively influence investor perceptions by signaling that a company is performing well and is confident about its future growth. Investors may view these dividends as a sign of stability and a commitment to shareholder value, which could lead to increased demand for the stock. However, if investors interpret large stock dividends as a lack of profitable investment opportunities that would warrant cash distribution, it might negatively impact their sentiment.
• Synthesize how large stock dividends and stock splits serve similar purposes for companies but differ in their implications for shareholder equity and market price.
  • Both large stock dividends and stock splits aim to increase the number of shares outstanding and enhance market liquidity, but they have distinct implications. Large stock dividends redistribute retained earnings without altering total equity, thereby maintaining shareholder equity while changing the per-share value. In contrast, stock splits also change the per-share price but don't impact retained earnings directly; instead, they simply divide existing shares into smaller portions. Ultimately, both actions make shares more affordable for investors but reflect different corporate strategies and market conditions.

Related terms

small stock dividends:

Distributions of additional shares that typically involve issuing 20% or less of the company's outstanding shares, which do affect retained earnings.

stock split:

A corporate action that increases the number of outstanding shares by dividing existing shares, thereby reducing the share price without affecting the company's market capitalization.

retained earnings:

The cumulative amount of net income that a company retains, rather than distributing it as dividends to shareholders.