Suppose a privately-held company is worth $1.1B, and has 1M shares over 1k shareholders. Each shareholder has a net worth of $1.1M. The company decides to issue a dividend of $100 per share.
If they hand out cash, that means the company is now worth $1B, and each shareholder has $100k more in cash. But their shares are now only worth $1k each, instead of the $1.1k they were worth before. The shareholder's net worth is unchanged.
If they hand out shares, there are now 1.1M shares in the company, and each is worth $1k, the same value per share as with the cash dividend. Each shareholder has an extra 100 shares, and their net worth is still unchanged from before the dividend.
So the key thing is that if they paid the dividend in cash, the overall net worth of the company goes down -- so everything balances out between shares and cash.
Of course, for a publicly-traded company the value of the stock doesn't necessarily match the current net worth of the company, and the share price fluctuates. So you'll need to work out for yourself whether you'd prefer to have the stock (with the capital gains liability) or the dividend (with its tax liability), possibly based on how long you intend to hold the stock.
Thanks, I got it. More cash for the company, and same net worth for shareholders (even more worth if you take taxes into account).
So this would lead to an exponential growth to the number of shares? It really looks like a geometric progression. And, at the end, a huge amount of shares, each worth nothing.
I imagine the hope is that the company keeps growing, so the share price will rise that way.
Also, the company can buy-back shares to keep the number in circulation lower and to increase the stock price, or it can consolidate its shares by merging them, so each shareholder receives one new share for each two old shares.
Lastly, if you're looking at stock charts, the data provider will usually adjust historical values to take into account dividends and splits, giving you an accurate view of what the price would have looked like if the number of shares issued had never changed.
If they hand out cash, that means the company is now worth $1B, and each shareholder has $100k more in cash. But their shares are now only worth $1k each, instead of the $1.1k they were worth before. The shareholder's net worth is unchanged.
If they hand out shares, there are now 1.1M shares in the company, and each is worth $1k, the same value per share as with the cash dividend. Each shareholder has an extra 100 shares, and their net worth is still unchanged from before the dividend.
So the key thing is that if they paid the dividend in cash, the overall net worth of the company goes down -- so everything balances out between shares and cash.
Of course, for a publicly-traded company the value of the stock doesn't necessarily match the current net worth of the company, and the share price fluctuates. So you'll need to work out for yourself whether you'd prefer to have the stock (with the capital gains liability) or the dividend (with its tax liability), possibly based on how long you intend to hold the stock.