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Property dividends are payouts that are alternatives to paying investors a cash dividend or providing additional shares of the company’s own stock. Instead, a property dividend compensates investors by issuing shares of stock associated with a subsidiary or offering some type of physical asset in lieu of the cash. A business may choose to issue a property dividend for several reasons, including the lack of available cash to honor the debt to investors.
While a property dividend is somewhat uncommon, it is not unusual for many businesses to include provisions for this option in the purchase agreements that govern the issuance of stock shares. Doing so is actually in the best interests of the investor as well as the issuer, because the property that is used to honor the obligation to the investor must have a market value that is at least equal to the amount owed. At the same time, the ability to honor the obligation with something other than cash or additional shares of stock allows the business to arrange its finances in a manner that is most likely to ensure the continued operation of the company, while still complying with the agreements that exist between the business and its investors.
One example of a situation in which a business may choose to issue a property dividend rather than the more traditional cash dividend has to do with avoiding the dilution of the company’s current share position while still holding on to its cash reserves. In this scenario, the company may choose to pay dividends in the form of shares associated with a subsidiary. Assuming that those shares have a current market value that is equal to the amount of the dividends due each investor, the payment is considered valid and in accordance with the contract between the business and its investors.
A company may also choose to issue a property dividend when there is a temporary lack of available cash to pay dividends. By using property that is not essential to the core operation of the business, investors still receive a return on the investment and the business does not place additional stress on its limited cash flow. If the choice is to issue shares of stock connected with a subsidiary, the business also increases the ties that exist between its investors and the parent organization, a strategy that may be helpful in the future. In addition, the use of the property may result in some tax benefits for the business, depending on current tax laws that apply in the jurisdiction where the company is located.
Can a bank use its loan receivables as a property dividend? How do we determine the value of the loan if it is allowed to use loan receivables as a property dividend?