In a perfect world, a successful company is one that attracts capital from shareholders once at the beginning and then distributes cash dividends to them periodically indefinitely.
There are 3 ways to distribute profits and one of them – in fact – is not distributing profits but retaining profits.
Method 1: Cash Dividends After the end of the fiscal year, the Board of Directors proposes to distribute a portion of the previous year’s profits to shareholders. In most cases, the General Assembly approves the proposal.
It is essential to know that the value of the stock traded on the stock exchange includes the value of the expected distribution, up to the last day on which the stockholder is entitled to the distribution.
Example Domty’s share in the market = EGP 5. If the value of the dividend = EGP 0.50, the share will trade at EGP 5 until the last day of maturity and then start trading at a price of EGP 4.50 the next day, but it may end the session at a higher price.
Method 2: Treasury Shares Treasury shares are shares purchased by the company issuing the shares.
Analytically, buying treasury shares = returning some of the money to the shareholders again, but at the current value and not at the nominal value that was paid at the time of incorporation. Therefore, it is considered a capital reduction.
In Egypt, the maximum amount that a company is allowed to purchase without referring to the general assembly (representatives of shareholders) is 10%.
If the company keeps its shares for a year without reselling them in the market, the company must write off the shares and reduce the capital.
Method 3: Stock Dividends And this type – in fact – is not a cash distribution at all, but an eternal retention of cash!
Example: Domty has 10 issued shares and the par value of each share = 1 EGP
Market price per share = EGP 2
All shares are owned by one shareholder
The company’s profits in 2022 = EGP 10
The company decided to distribute 10 bonus shares to the shareholder so that the number of issued shares = 20 shares
First, not a single pound was distributed from the company’s treasury, but the 10 pounds were reclassified from the item “Profits for the year” to the item “issued and paid-up capital”.
This means that these profits are not distributable again.
Second, the number of issued shares increased from 10 to 20 shares, but the market value of the share decreased from EGP 2 to EGP 1.
Why? Because all that happened was reclassifying the 10 pounds from item to item in the equity list, and no value was added to the company.
Note: In Egypt, the season for distributing cash dividends is during March and April of each year. However, these days, we notice an increase in companies buying treasury shares for several reasons, the most prominent of which is the expectation of a rise in their prices during the coming period.