Chapter 37
CAPITAL STRUCTURE POLICIES : Distribution in practice: dividends and share buy-backs

A dividend policy is assessed on the basis of the payout ratio and the growth rate of the dividend per share. The dividend does not constitute a remuneration of the shareholder since its collection is accompanied by a decrease in the share value by the same amount.

An exceptional dividend by its amount may be paid in addition to the ordinary dividend.

A company may buy back small quantities of shares that it will cancel or keep or larger quantities of shares through a public share buy-back tender offer in which the shareholders are free to participate or not.

The capital reduction or share buy-back leads to growth in earnings per share if the reverse of the P/E ratio of the share is higher than the after-tax interest rate of the debt incurred (or short-term investments used to finance it). But make no mistake, this has nothing to do with value creation.

Value is only created if the increased debt burden forces managers to perform better, or if shares are bought back at a price below their value, or if the funds thus returned to shareholders are invested in the company at an insufficient return.

The big difference between, on the one hand, the dividend and, on the other hand, the exceptional dividend, the share buy-back and the capital reduction, is that the dividend is normally recurrent and any change in its level is perceived as a signal. On the other hand, exceptional dividends, share buy-backs and capital reductions are one-off operations, not recurring in nature.

The choice of tools used to return cash to the shareholder also depends on the impact on the composition of the shareholder base and on management stock options and, finally, on tax considerations.