Molina Corporation is a firm that has a policy on paying their stockholders cash dividends every three months annually. It has done so for the past fifteen years. In the last half of the year, Molina Corporation has experienced a cash drain because there has been huge competition in the market making the profit margins to decrease. The cash balance of the firm currently is only sufficient to sustain the firm’s day-to-day operations requirement and the president; Rob Lowery has a suggestion to reduce the high cash drain the firm is experiencing. He suggests that the stockholders should be paid their dividends in stock dividends and not cash dividends. Debbie Oler, the vice president, has to inform others through a press release that the firm will be issuing a 5% stock dividend to convince the stockholders that the stock dividend idea is as good as offering them cash dividend. The paper will focus on the stakeholders of the firm in this situation if Lowery’s actions are unethical and the effect of a stock dividend on a firm’s stockholder’s equity accounts. Additionally, there will be a discussion of the best dividends to a stockholder between cash dividend and stock dividend.
Stakeholders
Stakeholders are people or groups with interest in a business, and they are affected by the actions, policies or objectives of a firm (Heintz & Parry, 2017). The stakeholders affected by the change of cash dividend to the stock dividend in Molina Corporation are the stockholders. The stockholders are the individuals, groups or companies that have invested in Molina Corporation through the purchase of shares. They may have one or more shares within the firm hence have a right to ownership of part of the firm based on the number of shares one has bought in the company. They are the people who have been receiving cash dividends from their shares they have from Molina Corporation and have been receiving their cash dividends for the past fifteen years. They, therefore, have a right to know about the state of their shares and what plans the management have on offering them a dividend.
Ethics
Both cash dividends and stock dividends have benefits to stockholders. It is therefore not unethical to change cash dividend to stock dividend as it has its benefits to the stockholders. They have the right to know the progress and current performance of their shares hence the vice president informing them are important. The president has however asked the vice president to convince them that stock dividend is as good as a cash dividend. He has not used the right channel where the vice president should be transparent on the current performance of Molina Corporation and inform the stockholders the valid reason why the change of stock is happening. It is not right to use a not straightforward deal, and the stockholders should not be misled into accepting the offer intentionally. It should be a suggestion that should lead to a consensus between the management and the stockholders instead. It is, therefore, unethical for the management to be unclear on the issue and look for ways they can convince the stockholders into accepting their decision.
Effect on equity accounts
The equity accounts of a company include the preferred and common stock, par value and the capital contributed more than the profits accumulated for a company. Stock dividends can reduce the retained earnings of a firm. A stockholder no longer receives income at a stipulated time however he or she can sell the shares to recover the money. They, however, increase the same way as in the paid-in capital. When calculations by adding preferred stock to common stock and later adding any additional paid-in capital, subtracting treasury stock and adding or reducing the retained earnings, one realizes that the total stockholders’ equity remains unchanged. It is, therefore, clear that whether the stockholders receive cash dividend or stock dividend, there will be no effect on equity accounts as they will remain as they should have been if it was cash dividend being offered to them.
Cash dividend or stock dividend
A cash dividend is a form of dividend where the stockholders are paid in cash for each share they have with the company. It is majorly done in the form of a check. It offers stockholders a steady source of income and can still be resold as the stockholder is still in possession of the shares (Weygandt, 2010). It also allows stockholders to valuate a decline or increase in stock price in the market based on the monthly, quarterly or annual income one gets from the shares. It can be calculated by taking the annual dividend per share with the current stock price in the market. A firm is also likely to be more conservative with its finances when it is offering cash dividends to avoid getting into debts. However, cash dividends are taxed each time a stockholder is paid. It also makes the firm to have less money to invest each time a payment is made as it uses up some of the cash funds it has to pay the stockholders.
Stock dividends are dividends offered in the form of stock and not cash. The stockholder retains 100% of the payout after being reinvested as no taxes are involved in the payout (Needles, Powers & Crosson, 2010). They also have a faster re-investment growth because all returns are reinvested back into the shares instead of one taking cash each time. The stockholder, therefore, benefits from faster re-investment growth and tax savings. However, the stockholder cannot acquire cash from the firm unless he or she sells the shares out. When selling shares, one can receive money, but the shares will be no more unlike in the cash dividend where one gets cash, but shares are retained. There is also taxation when selling the shares which show that the shares are not fully non-taxable.
As a stockholder, there are various issues one needs to focus on to ensure that you get enough money from the investment one makes. Stock dividends are suitable for people who want to make a long-term investment while cash dividends are for short term investors (Isenberg, Shubik & Whitman, 2013). It is also important to look at if one expects to earn income from it every year or quarterly to choose between a stock dividend or cash dividend. As a stockholder, it is better to have stock dividends as one is not taxed every time income is earned, and it is a better reinvestment strategy as the returns are reinvested back into one’s equity account.
In conclusion, a stock dividend is offered as stock returns to stockholders while cash dividends are offered in the form of a steady income. Molina Corporation is planning to convince its stockholders to change their cash dividends into stock dividends because it have been a reduction of cash for the firm. The president is, however, using a wrong channel as he is asking the vice president to convince the stockholders without giving them a valid reason why it is happening which is unethical. Stock dividends, however, do not affect the equity accounts of stakeholders, and it would be better to invest in stock dividend than cash dividend because of tax exemptions and a faster re-investment growth when stockholders are offered stock dividends.