Dividend Decision 01
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Transcript of Dividend Decision 01
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Dividend Payments
1) Declaration Date: the board of
directors declares the dividend,
determines the amount of the dividend,
and decides on the payment date.
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Dividend Payments
&) !"#Dividend Date:
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Dividend Payments
&) !"#Dividend Date: 'o receive the
dividend, you have to buy the stoc( before
the e"#dividend date. n this date, the
stoc( be*ins tradin* +e"#dividend and
the stoc( price falls appro"imately by the
amount of the dividend.
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Dividend Payments
3) Date of $ecord:
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Dividend Payments
3) Date of $ecord: & days after the e"#dividend date, the firm receives the list ofstoc(holders eli*ible for the dividend.
• ften, a ban( trust department acts asre*istrar and maintains this list for thefirm.
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Dividend Payments
4) %ayment Date: date on -hich the
firm mails the dividend chec(s to the
shareholders of record.
Jan.4 Jan.30 Feb.1 ar. 11
Declare !"#div. $ecord %ayment
dividend date date date
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Stock Returns:
%1 # %o D1
%o$eturn /
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%1 # %o D1
%o
%1 # %o D1
%o %o
$eturn /
/
Stock Returns:
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$eturn /
apital ain
%1 # %o D1
%o
%1 # %o D1
%o %o/
Stock Returns:
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$eturn /
apital ain Dividend 2ield
/
Stock Returns:
%1 # %o D1
%o
%1 # %o D1
%o %o
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Dilemma: Should the firm use
retained earnings for:
a) Financin* profitable capital
investments
b) %ayin* dividends to stoc(holders
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• f -e retain earnin*s for profitable
investments,
%1 # %o D1
%o %o
$eturn /
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• f -e retain earnin*s for profitable
investments, dividend yield -ill be 5ero,
%1 # %o D1
%o %o
$eturn /
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• f -e retain earnin*s for profitable
investments, dividend yield -ill be 5ero,but the stoc( price -ill increase, resultin*
in a hi*her capital *ain.
%1 # %o D1
%o %o
$eturn /
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• f -e pay dividends,
%1 # %o D1
%o %o
$eturn /
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• f -e pay dividends, stoc(holders receive
an immediate cash re-ard for investin*,
%1 # %o D1
%o %o
$eturn /
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• f -e pay dividends, stoc(holders receive
an immediate cash re-ard for investin*,but the capital *ain -ill decrease, since
this cash is not invested in the firm.
%1 # %o D1
%o %o
$eturn /
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So, dividend policy really
involves 2 decisions:• 6o- much of the firm7s earnin*s
should be distributed to
shareholders as dividends, and
• 6o- much should be retained for
capital investment
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Is Dividend Policy Important?
'hree vie-points:
1) Dividends are rrelevant. f -e
assume perfect mar(ets 8no ta"es,no transaction costs, etc.) dividends
do not matter. f -e pay a
dividend, shareholders7 dividendyield rises, but capital *ains
decrease.
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• 9ith perfect mar(ets, investors are
concerned only -ith total returns,and do not care -hether returns
come in the form of capital *ains or
dividend yields.
%1 # %o D1
%o %o
$eturn /
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• 9ith perfect mar(ets, investors are
concerned only -ith total returns,and do not care -hether returns
come in the form of capital *ains or
dividend yields.
%1 # %o D1
%o %o
$eturn /
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• 9ith perfect mar(ets, investors are
concerned only -ith total returns,and do not care -hether returns
come in the form of capital *ains or
dividend yields.• 'herefore, one dividend policy is as
*ood as another.
%1 # %o D1
%o %o
$eturn /
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2) igh Dividends are !est
• ome investors may prefer a certain
dividend no- over a ris(y e"pected
capital *ain in the future.
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2) igh Dividends are !est
• ome investors may prefer a certain
dividend no- over a ris(y e"pected
capital *ain in the future.
%1 # %o D1
%o %o$eturn /
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") #o$ Dividends are !est
• Dividends are ta"ed immediately.
apital *ains are not ta"ed until the
stoc( is sold.
• 'herefore, ta"es on capital *ains can
be deferred indefinitely.
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Do Dividends %atter?
&ther 'onsiderations:
1) $esidual Dividend 'heory:
• 'he firm pays a dividend only if it hasretained earnin*s left after financin*
all profitable investment
opportunities.• 'his -ould ma"imi5e capital *ains for
stoc(holders and minimi5e flotation
costs of issuin* ne- common stoc(.
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Do Dividends %atter?
&) lientele !ffects:
• Different investor clienteles prefer different
dividend payout levels.
• ome firms, such as utilities, pay out over;0< of their earnin*s as dividends. 'hese
attract a clientele that prefers hi*h
dividends.• ro-th#oriented firms -hich pay lo- 8or
no) dividends attract a clientele that prefers
price appreciation to dividends.
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Do Dividends %atter?
3) nformation !ffects:
• =ne"pected dividend increases
usually cause stoc( prices to rise, andune"pected dividend decreases cause
stoc( prices to fall.
• Dividend chan*es convey informationto the mar(et concernin* the firm7s
future prospects.
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Do Dividends %atter?
4) >*ency osts:• %ayin* dividends may reduce a*ency
costs bet-een mana*ers and
shareholders.• %ayin* dividends reduces retained
earnin*s and forces the firm to raise
e"ternal e?uity financin*.
• $aisin* e"ternal e?uity sub@ects the firm
to scrutiny of re*ulators 8!) and
investors and therefore helps monitor the
performance of mana*ers.
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Do Dividends %atter?
A) !"pectations 'heory:
• nvestors form e"pectations concernin*
the amount of a firm7s upcomin*
dividend.
• !"pectations are based on past dividends,
e"pected earnin*s, investment and
financin* decisions, the economy, etc.
• 'he stoc( price -ill li(ely react if the
actual dividend is different from the
e(pected dividend .
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Dividend Policies
1) onstant Dividend %ayout $atio: ifdirectors declare a constant payout
ratio of, for e"ample, 30
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Dividend Policies
&) table $upees Dividend %olicy:
the firm tries to pay a fi"ed rupee
dividend each ?uarter.• Firms and stoc(holders prefer
stable dividends. Decreasin* the
dividend sends a ne*ative si*nalB
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Dividend Policies
3) mall $e*ular Dividend plus 2ear#!nd !"tras
• 'he firm pays a stable ?uarterly
dividend and includes an e"tra year#end dividend in prosperous years.
• Cy identifyin* the year#end dividend
as +e"tra, directors hope to avoidsi*nalin* that this is a permanentdividend.
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inancial Signaling
• ash dividends spea( louder than -ords
• ccur if the dividend is more or less thane"pected
• %rice of the stoc( may react tounanticipated chan*es in dividends
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*mpirical +esting and
Implications for Payout
• !"#dividend day tests
– Cehavior of common stoc( prices
• Dividend#yield approach – $elationship bet-een dividend yields and
stoc( returns
• Financial si*nalin* studies
– >t the time of the dividend chan*e findthat there is a si*nificant earnin*s chan*e
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Implications for 'orporate Policy
• 'a" effect consistent -ith dividend
neutrality
• i*nalin* effect
– ptimal dividend policy
– a"imi5e shareholder -ealth• !"cess cash
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Share Repurchase
• ncreased in importance relative todividends
• ubstitute for cash dividends• !mployee stoc( options and share
repurchase
– eans to compensate employees – !mployees -ith e"istin* stoc( options
prefer share repurchase
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Method of Repurchase
• Fixed-price tender offer
– Formal offer to stockholders to purchase so
many shares at a set price
• Dutch-auction tender offer – Dominant form of tender offer
• Open-market purchase
– SEC rules• Disclose intentions
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Repurchasing as Part of a
Dividend Decision• Fewer shares remaining outstanding
– ES rise
– Di!idends per share rise
– "arket price per share should rise
• E#uili$rium formula
– %here S is the num$er of shares outstanding prior to thedistri$ution& c ' is the current market price per share prior to
distri$ution& n is the num$er of shares to $e repurchased(• ersonal tax effect
• Signaling effect – Differs with the method of repurchase
nS
P X S P c
−
= )
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Stock Dividends and Stock Splits
• toc( dividend: payment of additional
shares of stoc( to common stoc(holders.
• !"ample: iti5ens Can( corporation
announces a A< stoc( dividend to all
shareholders of record. For each 100
shares held, shareholders receive another
A shares.
• Does the shareholders7 -ealth increase
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Stock Dividends and Stock Splits
• toc( plit: the firm increases the number
of shares outstandin* and reduces the
price of each share.
• !"ample: Joule, nc. announces a 3#for#&
stoc( split. For each 100 shares held,
shareholders receive another A0 shares.
• Does this increase shareholder -ealth
• >re a stoc( dividend and a stoc( split the
same
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Stock Dividends and Stock Splits
• toc( plits and toc( Dividends are
economically the same: the number of
shares outstandin* increases and the priceof each share drops. 'he value of the firm
does not chan*e.
• !"ample: > 3#for#& stoc( split is the sameas a A0< stoc( dividend. For each 100
shares held, shareholders receive another
A0 shares.
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Stock Dividends and Stock Splits
• !ffects on hareholder 9ealth:
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Stock Dividends and Stock Splits
• !ffects on hareholder 9ealth: these -ill
cut the company +pie into more pieces
but -ill not create -ealth. > 100< stoc(
dividend 8or a for#1 stoc( split) *ivesshareholders & half#si5ed pieces for each
full#si5ed piece they previously o-ned.
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Stock Dividends and Stock Splits
• !ffects on hareholder 9ealth: these -ill
cut the company +pie into more pieces
but -ill not create -ealth. > 100< stoc(
dividend 8or a for#1 stoc( split) *ivesshareholders & half#si5ed pieces for each
full#si5ed piece they previously o-ned.
• For e"ample, this -ould double thenumber of shares, but -ould cause a $s.0
stoc( price to fall to $s.30.
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Stock Dividends and Stock Splits
• 9hy bother
• %roponents ar*ue that these are used to
reduce hi*h stoc( prices to a +more
popular tradin* ran*e 8*enerally $s.1A to$s.;0 per share).
• pponents ar*ue that most stoc(s are
purchased by institutional investors -hohave millions of rupees to invest and are
indifferent to price levels. %lus, stoc( splits
and stoc( dividends are e"pensiveB
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Stock Dividend *(ample
• shares outstandin*: 1,000,000
• net income / $s.,000,000E
• %! / 10• &An investor has 1&0 shares. Does the
value of the investor7s shares
chan*e
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Cefore the &A< stoc( dividend:
• !% / ,000,0001,000,000 / $s.• %! / % / 10, so % / $s.0 per share.
• Galue / $s.0 " 1&0 shares / $s.;,&00
>fter the &A< stoc( dividend:
• H shares / 1,000,000 " 1.&A / 1,&A0,000.
• !% / ,000,0001,&A0,000 / $s.4.I0
• %! / %4.I0 / 10, so % / $s.4I per share.
• nvestor no- has 1&0 " 1.&A / 1A0 shares.
• Galue / $s.4I " 1A0 / $s.;,&00
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Stock Dividends
n#class %roblem
shares outstandin*: &A0,000
net income / $s.;A0,000E
stoc( price / $s.I4
-. stock dividend/
9hat is the ne- stoc( price
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int:
stoc( price
%! / net income
H shares8 )
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Cefore the A0< stoc( dividend:
• !% / ;A0,000 &A0,000 / $s.3
• %! / I4 3 / &I.
>fter the A0< stoc( dividend:
• H shares / &A0,000 " 1.A0 / 3;A,000.
• !% / ;A0,000 3;A,000 / $s.&
• %! / % & / &I, so % / $s.A per share.
8a A0< stoc( dividend is e?uivalent to a3#for#& stoc( split)
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Stock Splits• *um$er of shares is increased through a
proportional reduction in the par !alue• "ay increase cash di!idends• lace the stock in a more-popular trading range• +nformational or signaling effect
– ,symmetric information• ercei!ed earnings• *ot the stock di!idend nor split itself
• e!erse stock split – educe the num$er of shares
– .sually a negati!e signal
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Managerial Considerations as to
Dividend/Share-Repurchase Policy• Funds needs of the firm
• ,$ility to $orrow
• Control• *ature of stockholders
• /i#uidity
• estrictions
• Di!idend sta$ility
• 0arget-payout ratios
• ,ssessment of any
!aluation information
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Some Final !servations
• Di!idend in excess of residual implies a fa!ora$le
effect on shareholder wealth
• /ack of clear empirical e!idence
• "any companies $elie!e di!idend payout affectsshare price
• epurchase of stock
– %hen si1a$le amount of excess funds exists – +ncreasingly more important