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Finance allah shmoop what is payment in kind or a

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pick All right so you know what a normal vanilla

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dividend is right A company is so profitable it can't

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think of anything else to do with its excess cash

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so it just gives it back to its shareholders a

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really nice gig if you can get it The company's

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stock trading a twenty bucks a share pays twenty cents

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a quarter in dividends or eighty cents a year and

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well that yields four percent Got it that's eighty cents

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over twenty bucks Simple vanilla dividend Will companies also often

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carry debt The company whatever dot com has fifty million

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dollars in debt which cost them six percent a year

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or three million dollars a year to pay the interest

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to rent that money when times were good the company

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pays the interest in cash but dividends and interest payments

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aren't necessarily always paid in cash They can be paid

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in stock as well And yes this is weird Why

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would a company pay a dividend or bond interest in

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its own stock that would dilute the equity ownership of

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the company So why would they do it Because they

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had teo some companies will have offered bonds which give

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the company the option of saying that interest either in

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stock or in cash and company thinks it is in

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jeopardy of potentially going bankrupt Well it will pay its

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interest obligations in stock instead and this is generally a

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very bad thing for equity holders and the bondholders I'm

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so happy about it either because they don't know what

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that stockton worth bond people are meeting potatoes kind of

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people and they just like cats Thank you very much

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So what does that communicate to the shareholders Well it

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communicates that the company's management at least thinks it's equity

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is overvalued so the company is choosing to dilute equity

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holders by using its equity or stock as a currency

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instead of cash and even worse the company might be

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communicating well that it's cash obligations are so tight it

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is so fearful of the b word that they have

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to pay in stock or they might go bankrupt So

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kind of armageddon ish scenario There cos will also pay

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dividends in stock at times for largely the same reasons

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but with different dilution dynamics Because in the case of

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the equity owners of the company and people who own

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their common shares all receiving you know pro ratted dividends

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or equally the same number of incremental shares as dividend

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meaning that the company is yes diluting itself but doing

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so equally to basically everyone who is a common shareholder

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So who does this screw in the process Option holders

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Yeah employees usually like if they only own options they're

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not entitled to dividends whether in cash or stock while

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they get diluted away for there hard nonunion efforts Yeah

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well this is called pick or payment in kind although

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to those screwed over option holders there's a you know 00:02:55.183 --> [endTime] not much kind innit

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