Paying dividends by shares or shares is a fairly common form, common in joint stock companies (JSCs), especially in businesses that are in the growth phase and want to retain profits for investment. business development and expansion.
Dividend in shares
In this form, instead of paying dividends in cash, the JSC can capitalize other items in equity and distribute dividends in shares or shares to shareholders. increases the number of shares issued in the charter capital without changing the company’s total assets, liabilities and equity. The following example can be taken:
Company A has
- Total assets: 5 billion VND
- Total liabilities: 300 million VND
- Equity: 4 billion, of which:
– Charter capital: 2 billion VND
– Retained profit: 1 billion VND
– The rest are other items.
Company A’s cash dividend from the profit of 1 billion dong will reduce its total assets and equity by 1 billion dong. However, if Company A pays a share dividend of 1 billion VND from retained earnings, Company A’s charter capital will increase to 3 billion VND (2 billion + 1 billion VND). Therefore, even though retained earnings are 0, the value of equity is still maintained at 4 billion dong. The above dividend also keeps the total assets and liabilities of the Company unchanged.
Benefits of dividend by shares for shareholders
For shareholders of the company, when owning new shares is divided from dividends, shareholders will own more shares without paying more to the company. The share ownership ratio of shareholders in the new charter capital remains unchanged, because all shareholders will receive additional shares in proportion to their ownership ratio.
In addition, for individual investors who receive dividends in shares, point d, Clause 2, Article 11 of Circular 111/2013/TT-BTC stipulates: In case of receiving stock dividends, the individual is not pay personal income tax when receiving shares, but only when transferring, the obligation to pay personal income tax is set.
This regulation is reasonable, because receiving dividends according to the above method does not generate income for shareholders, because the number of shares increases by how much %, the value of each share will decrease by that much. company value does not change.
Risk to shareholders
However, when a shareholder wants to sell shares to be distributed as dividends, this transfer cannot take place immediately, shareholders must wait a certain time to receive the corresponding shares before they can proceed with the transfer. (according to Clause 4, Article 135 of the Law on Enterprises, dividends must be paid within 6 months from the end of the Annual General Meeting of Shareholders). At the same time, shareholders will also have a corresponding reduction in share ownership.
Another risk for shareholders receiving dividends in the form above, if the company retains capital for investment and business, but it is not effective, it will lead to a decrease in share price, affecting shareholders.
Investors also need to further evaluate the financials of the business. Some businesses use financial tricks that help with positive business results but do not generate cash flow. High profit but a lot of it is in receivables, unfinished assets… shows financial flow problems. Paying dividends in shares is a measure to help businesses legitimize many financial indicators and this is completely different from investment expansion. The company’s shares are heavily diluted and with such financial strength, it will be difficult for the stock price to rise again or pay high dividends for the next year.
Thus, with prudent investors, they will put their trust more fully in businesses that pay dividends in both cash and stock, while still expanding reinvestment.
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