Cash-And-Stock Dividend

Finance allah shmoop what is payment in kind or a

pick All right so you know what a normal vanilla

dividend is right A company is so profitable it can't

think of anything else to do with its excess cash

so it just gives it back to its shareholders a

really nice gig if you can get it The company's

stock trading a twenty bucks a share pays twenty cents

a quarter in dividends or eighty cents a year and

well that yields four percent Got it that's eighty cents

over twenty bucks Simple vanilla dividend Will companies also often

carry debt The company whatever dot com has fifty million

dollars in debt which cost them six percent a year

or three million dollars a year to pay the interest

to rent that money when times were good the company

pays the interest in cash but dividends and interest payments

aren't necessarily always paid in cash They can be paid

in stock as well And yes this is weird Why

would a company pay a dividend or bond interest in

its own stock that would dilute the equity ownership of

the company So why would they do it Because they

had teo some companies will have offered bonds which give

the company the option of saying that interest either in

stock or in cash and company thinks it is in

jeopardy of potentially going bankrupt Well it will pay its

interest obligations in stock instead and this is generally a

very bad thing for equity holders and the bondholders I'm

so happy about it either because they don't know what

that stockton worth bond people are meeting potatoes kind of

people and they just like cats Thank you very much

So what does that communicate to the shareholders Well it

communicates that the company's management at least thinks it's equity

is overvalued so the company is choosing to dilute equity

holders by using its equity or stock as a currency

instead of cash and even worse the company might be

communicating well that it's cash obligations are so tight it

is so fearful of the b word that they have

to pay in stock or they might go bankrupt So

kind of armageddon ish scenario There cos will also pay

dividends in stock at times for largely the same reasons

but with different dilution dynamics Because in the case of

the equity owners of the company and people who own

their common shares all receiving you know pro ratted dividends

or equally the same number of incremental shares as dividend

meaning that the company is yes diluting itself but doing

so equally to basically everyone who is a common shareholder

So who does this screw in the process Option holders

Yeah employees usually like if they only own options they're

not entitled to dividends whether in cash or stock while

they get diluted away for there hard nonunion efforts Yeah

well this is called pick or payment in kind although

to those screwed over option holders there's a you know 00:02:55.183 --> [endTime] not much kind innit