Week 3 fin6301

Week 3 Fin6301 Name: Institutional Affiliation: Course: Date: Part I Introduction In the article “Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support” Aparana Narayani discusses Royal Dutch Shell's significant stock buyback program. According to the company CEO, the big stock buyback of $25 billion brought about a recovery, increased free cash flow outlook, and gave strength to the balance sheets. Notably, the surging oil prices have triggered a rise in stock prices, with Exxon and Chevron recording higher margins lately. US-IRAN tension brought market tensions and Chevron stock dropped by 0.7% (Narayanan, 2018). Stable dividend policies are important, there are reasons behind stock repurchases, and individual metrics are largely affected by stock repurchase plans and returns. Importance of Stable Dividend Policies According to the Corporate of Finance Institute (2024), stable dividend policies offer fixed dividend payments annually even with volatile earnings. Stable dividend policies are key in attracting and keeping investors, especially in the old and energy sector which often experiences cyclical fluctuations. With a stable dividend policy, investors have a steady income, making the investment attractive, especially for people considered income-oriented such as retirees. More so, a stable dividend policy showcases the company’s commitment to returning value to shareholders while enhancing credibility and reputation among shareholders and investors. Reasons for Stock Repurchases There a many reasons why a company considers stock repurchases or share buybacks beneficial. Often, share buyback is a strategic decision used to enhance shareholder value while optimizing capital structure. In most instances, buybacks are undertaken by companies due to undervaluation. This happens when a company perceives its stock as undervalued forcing them to repurchase shares and in the process signal confidence in prospects (Booth, 2022). Secondly, companies repurchase stock to optimize their capital structure i.e., returning the excess cash to its shareholders thus enhancing return on equity (ROE) and improving its financial leverage. Thirdly, repurchase enhances Earning Per Share (EPS) by reducing the total number of outstanding shares causing a boost in EPS, thus making the company attractive to prospects. Finally, stock repurchase reduces the cost of capital and also increases tax efficiency. Impact of Stock Repurchase Plans on Financial Metrics According to Chen & Liu, (2023) stock repurchasing reduces a business's total assets thus improving return on assets and return on equity, as compared to when not repurchasing. With EPS, stock repurchase reduces the number of outstanding shares (the denominator) creating the illusion of improved business profitability, something investors are looking for. With ROE, share buybacks reduce the equity base, thus causing an increase in ROE (Chen & Liu, 2023). Stock repurchase also affects leverage ratios such as debt to equity and interest coverage ratios, as well as the company's market capit...