When a company pays a stock dividend, what happens to Earnings Per Share (EPS)?

When a company pays a stock dividend, it distributes additional shares to existing shareholders instead of paying out cash. This action increases the total number of shares outstanding. While the net income of the company remains the same, the earnings are now spread over a larger number of shares.

Since Earnings Per Share (EPS) is calculated by dividing the company's net income by the total number of outstanding shares, an increase in the number of shares results in a lower EPS figure. Therefore, the correct outcome is that EPS decreases.

This change does not reflect an actual decline in profitability but rather a dilution of earnings per share due to the increase in the share count. Understanding this concept is crucial for analyzing the impact of stock dividends on a company's financial metrics.