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Distribution policy is a firm’s policy where the directors have to decide about a) amount of level of earnings to be distributed, b) the form of distribution ie. whether through cash dividend distribution ie. "bird in the hand" or Stock repurchases ie. "future dividend growth", c) whether stability in the distribution type exists.
In Distribution policy the income earned by firm is distributed to its owner ie. the shareholders in the form or cash dividend or stock repurchases.
The dividend distribution amount will depend on firm’s future investment opportunities. In last few years, the pattern of distribution has been changing from cash dividend to Stock repurchase schemes. The stock repurchase will enhance the existing shareholder’s dividend per share in future. The repurchase of stock would reduce the outstanding Shares of the firm after every repurchase of stock and increase the dividend incidence on each share in future. Therefore, the existing shareholders would able to enjoy firm’s higher return on capital.
The distribution mix of the "Dividend" and "Stock repurchases" will provide the benefits of both policy ie. "bird in the hand" and "future dividend growth".
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