dividend policy and internal financing
DESCRIPTION
Dividend Policy and Internal Financing. Chapter 17. Dividend Policy and Internal Financing. Dividend Policy. Dividend per Share Earnings per Share. Dividend Payout Ratio =. Dividend Policy and Internal Financing. Dividend Policy. Dividend per Share Earnings per Share. - PowerPoint PPT PresentationTRANSCRIPT
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Dividend Policy andDividend Policy andInternal FinancingInternal Financing
Chapter 17Chapter 17
..
3Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
4Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
A firm calculates and reports Earnings per ShareA firm calculates and reports Earnings per Share
5Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
A firm calculates and reportsA firm calculates and reports earn Earnings per Shareearn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
6Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
A firm calculates and reportsA firm calculates and reports earn Earnings per Share earn Earnings per Share Management will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividendIncome Statement
1 Million Shares Outstanding1 Million Shares Outstanding
Sales $3,000,000
Net Income $1,000,000Dividends PaidAddition to RE
7Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
Income Statement
Sales $3,000,000
Net Income $1,000,000Dividends PaidAddition to RE
1 Million Shares Outstanding1 Million Shares Outstanding
EPS = $1.00
Stockholders earn Earnings per ShareStockholders earn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
8Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
Income Statement
Sales $3,000,000
Net Income $1,000,000Dividends PaidAddition to RE
1 Million Shares Outstanding1 Million Shares Outstanding
If have a 50% dividend payout each share of stock will receive a 50¢ dividend
Stockholders earn Earnings per ShareStockholders earn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
9Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
Income Statement
Sales $3,000,000
Net Income $1,000,000Dividends Paid 500,000Addition to RE $500,000
1 Million Shares Outstanding1 Million Shares Outstanding
If have a 50% dividend payout each share of stock will receive a 50¢ dividend
$500,000 paid to stockholders and $500,000 is reinvested in the firm
$500,000 paid to stockholders and $500,000 is reinvested in the firm
Stockholders earn Earnings per ShareStockholders earn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
10Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
Income Statement
1 Million Shares Outstanding1 Million Shares Outstanding
If it has a 0% dividend payout, all earnings are reinvested in the firmSales $3,000,000
Net Income $1,000,000Dividends PaidAddition to RE
Stockholders earn Earnings per ShareStockholders earn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
11Dividend Policy and Internal FinancingDividend Policy and Internal Financing
Dividend PolicyDividend Policy
Dividend Payout Ratio = Dividend per ShareEarnings per Share
Income Statement
1 Million Shares Outstanding1 Million Shares Outstanding
If have a 0% dividend payout, all earnings are reinvested in the firm
$0 paid to stockholders and $1,000,000 is reinvested in the firm
$0 paid to stockholders and $1,000,000 is reinvested in the firm
Sales $3,000,000
Net Income $1,000,000Dividends Paid 0Addition to RE $1,000,000
Stockholders earn Earnings per ShareStockholders earn Earnings per ShareManagement will reinvest part of earnings per share in Management will reinvest part of earnings per share in
the company and pay part as dividendthe company and pay part as dividend
12Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share PriceThree Theories of DividendsThree Theories of Dividends
IrrelevanceDividends Increase Stock PriceDividends Decrease Stock Price
13Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
14Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg
s 42½ 29 MKPS MK 1.75 5.1 24 5067 35 33 34¼ -1
When dividend of $1.75 is paid. the stock price falls by exactly the same amount.
15Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg
s 42½ 29 MKPS MK 1.75 5.1 24 5067 35 33 34¼ -1
When dividend of $1.75 is paid. the stock price falls by exactly the same amount.
$34.25 – $1.75 = $32.50
16Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
Dividends are Irrelevant Since:Dividends are Irrelevant Since:No net gain to investor
17Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
Dividends are Irrelevant Since:Dividends are Irrelevant Since:No net gain to investorWithout receiving dividend, an investor can sell shares
of stock costlessly and create their own "dividend"
18Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Assumes Perfect MarketsAssumes Perfect MarketsNo brokerage feesNo floatation costs of issuing sharesNo taxesEqual access to informationManager's act in shareholders' best interests
View 1: Irrelevance View 1: Irrelevance Dividend Policy does not affect stock price
Dividends are Irrelevant Since:Dividends are Irrelevant Since:No net gain to investorWithout receiving dividend, an investor can sell shares
of stock costlessly and create their own "dividend"If the firm pays a large dividend, but needs cash to
invest can sell additional shares of stock costlessly.
19Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Theory states:Theory states:Dividends are more predicable that capital gains,
so investors prefer dividends--"Bird in the Hand theory”
View 2: High Dividends Increase Stock ValueView 2: High Dividends Increase Stock Value
20Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Theory states:Theory states:Dividends are more predicable that capital gains,
so investors prefer dividends--"Bird in the Hand theory"
To be indifferent, investors will require a higher rate on capital gains than dividends
View 2: High Dividends Increase Stock ValueView 2: High Dividends Increase Stock Value
21Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Theory states:Theory states:Dividends are more predicable that capital gains,
so investors prefer dividends-- "Bird in the Hand theory”
To be indifferent, investors will require a higher rate on capital gains than dividends
Critics of this theoryPoint out cash flows of overall firm are not
affected by dividendsIf investors want cash, they should leave money
in a bank account
View 2: High Dividends Increase Stock ValueView 2: High Dividends Increase Stock Value
23Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Based on Tax Effects:Based on Tax Effects:Individual investors must pay taxes on dividends as
the dividends are received
View 3: Low Dividends Increase Stock ValueView 3: Low Dividends Increase Stock Value
24Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Based on Tax Effects:Based on Tax Effects:Individual investors must pay taxes on dividends as
the dividends are receivedIndividual investors can deferdefer taxes on capital gains
until they sell the stock
View 3: Low Dividends Increase Stock ValueView 3: Low Dividends Increase Stock Value
Before 1987, Capital Gains were taxed at a lower rate than dividends. Again today, capital gain taxes are lower than current income taxes
Before 1987, Capital Gains were taxed at a lower rate than dividends. Again today, capital gain taxes are lower than current income taxes
25Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Based on Tax Effects:Based on Tax Effects:Individual investors must pay taxes on dividends as
the dividends are receivedIndividual investors can deferdefer taxes on capital gains
until they sell the stock
View 3: Low Dividends Increase Stock ValueView 3: Low Dividends Increase Stock Value
However, corporations may exclude 70% of dividends from corporate income taxes, so they may actually prefer a higher level of dividends
Before 1987, Capital Gains were taxed at a lower rate than dividends
Before 1987, Capital Gains were taxed at a lower rate than dividends
26Can Dividend Policy Affect Share PriceCan Dividend Policy Affect Share Price
Based on Tax Effects:Based on Tax Effects:Individual investors must pay taxes on dividends as
the dividends are receivedIndividual investors can deferdefer taxes on capital gains
until they sell the stock
View 3: Low Dividends Increase Stock ValueView 3: Low Dividends Increase Stock Value
However, corporations may exclude 70% of dividends from corporate income taxes, so they may actually prefer a higher level of dividends
Investors prefer the dividend policy that gives the highest after-tax return
Before 1987, Capital Gains were taxed at a lower rate than dividends
Before 1987, Capital Gains were taxed at a lower rate than dividends
27Residual Dividend TheoryResidual Dividend Theory
Recognizes that floatation costs involved in issuing new stock are very high
Recognizes that floatation costs involved in issuing new stock are very high
28Residual Dividend TheoryResidual Dividend Theory
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs involved in issuing new stock are very high
Recognizes that floatation costs involved in issuing new stock are very high
29Residual Dividend TheoryResidual Dividend Theory
Residual Dividend MethodResidual Dividend MethodAccept all investments with positive net present values
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs involved in issuing new stock are very high
Recognizes that floatation costs involved in issuing new stock are very high
30Residual Dividend TheoryResidual Dividend Theory
Residual Dividend MethodResidual Dividend MethodAccept all investments with positive net present valuesUse retained earnings to finance investments to the
extent possible
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs involved in issuing new stock are very high
Recognizes that floatation costs involved in issuing new stock are very high
31Residual Dividend TheoryResidual Dividend Theory
Residual Dividend MethodResidual Dividend MethodAccept all investments with positive net present valuesUse retained earnings to finance investments to the
extent possibleIf earnings left over after making investments, pay a
dividend with the residual
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs involved in issuing new stock are very high
Recognizes that floatation costs involved in issuing new stock are very high
32Residual Dividend TheoryResidual Dividend Theory
Residual Dividend MethodResidual Dividend MethodAccept all investments with positive net present valuesUse retained earnings to finance investments when
possibleIf retained earnings left over after making investments,
pay a dividend with the residualIf there are no residual funds, pay no dividend
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs are involved in issuing new stock are very high
Recognizes that floatation costs are involved in issuing new stock are very high
33Residual Dividend TheoryResidual Dividend Theory
Residual Dividend MethodResidual Dividend MethodAccept all investments with positive net present valuesUse retained earnings to finance investments when
possibleIf retained earnings left over after making investments,
pay a dividend with the residualIf there are no residual funds, pay no dividend
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Companies with investment opportunities which require capital would prefer to use internal funds rather than issue new stock
Recognizes that floatation costs when issuing new stock are very highRecognizes that floatation costs when issuing new stock are very high
Residual Theory minimizes floatation costsResidual Theory minimizes floatation costs
34The Clientele EffectThe Clientele Effect
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
35The Clientele EffectThe Clientele Effect
Recognizes that investors are not all alikeRecognizes that investors are not all alike
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
36The Clientele EffectThe Clientele Effect
The Clientele EffectThe Clientele EffectSome investors need regular cash from stock: to avoid
brokerage fees should purchase and hold high dividend paying stocks
Recognizes that investors are not all alikeRecognizes that investors are not all alike
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
37The Clientele EffectThe Clientele Effect
The Clientele EffectThe Clientele EffectSome investors need regular cash from stock: to avoid
brokerage fees should purchase and hold high dividend paying stocks
Other investors prefer no cash from stocks: to defer taxes and brokerage fees on reinvested cash (dividends), these investors should buy low or no dividend paying stocks
Recognizes that investors are not all alikeRecognizes that investors are not all alike
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
Relaxes the assumption of no brokerage fees: in reality, investors must pay brokerage fees every time they buy or sell stock
38The Clientele EffectThe Clientele Effect
The Clientele EffectThe Clientele EffectSome investors need regular cash from stock: to avoid
brokerage fees should purchase and hold high dividend paying stocks
Other investors prefer no cash from stocks: to defer taxes and brokerage fees on reinvested cash (dividends), these investors should buy low or no dividend paying stocks
There is no correct dividend policy. Firms should have a stated dividend policy to keep clientele of investors
Recognizes that investors are not all alikeRecognizes that investors are not all alike
39The Information EffectThe Information Effect
Changes in dividends may provide a signal of firm's financial conditionChanges in dividends may provide a signal of firm's financial condition
Dividend Increase - May signal managers expect higher earnings in the future
Earnings UP 10%
50¢ Dividend Increase
40The Information EffectThe Information Effect
Changes in dividends may provide a signal of firm's financial conditionChanges in dividends may provide a signal of firm's financial condition
Earnings OFF 10%
25¢ Dividend CutDividend Decrease - May signal managers expect earnings downturn
41The Information EffectThe Information Effect
Changes in dividends may provide a signal of firm's financial conditionChanges in dividends may provide a signal of firm's financial condition
Earnings OFF 10%
25¢ Dividend CutDividend Decrease - May signal managers expect earnings downturn
In practice, stock price usually rises with a In practice, stock price usually rises with a unexpected dividend increase and falls with a unexpected dividend increase and falls with a dividend decreasedividend decrease
42Drop Agency CostsDrop Agency Costs
50Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
If managers announce a dividend at the level that investors expect, stock price will not be affected
If managers announce a dividend at the level that investors expect, stock price will not be affected
51Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
If managers announce a dividend at the level that investors expect, stock price will not be affected
If managers announce a dividend at the level that investors expect, stock price will not be affected
$2.25/share$2.25/share$2.25 share?$2.25 share?
InvestorInvestor ManagerManager
52Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
If managers announce a dividend at the level that investors expect, stock price will not be affected
If managers announce a dividend at the level that investors expect, stock price will not be affected
$2.25/share$2.25/share$2.25 share?$2.25 share?
InvestorInvestor ManagerManager
53Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
54Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$3.25 share?$3.25 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
55Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$3.25 share?$3.25 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
56Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$3.25 share?$3.25 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
If dividend is lower than expected, investors may believe earnings will be lower than expected and stock price will go down
If dividend is lower than expected, investors may believe earnings will be lower than expected and stock price will go down
57Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$1.75 share?$1.75 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
58Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$1.75 share?$1.75 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
59Expectations TheoryExpectations Theory
Investors have expectations of managers' actionsInvestors have expectations of managers' actions
$2.25/share$2.25/share$1.75 share?$1.75 share?
InvestorInvestor ManagerManager
If managers announce unexpectedly high or low dividend, stock price will be affectedIf managers announce unexpectedly high or low dividend, stock price will be affected
If dividend is higher than expected, investors may believe earnings will be higher than expected and stock price will go up
If dividend is higher than expected, investors may believe earnings will be higher than expected and stock price will go up
60Summary of Dividend TheoriesSummary of Dividend Theories
Tests of dividend policy have not found Tests of dividend policy have not found conclusively that dividends affect stock priceconclusively that dividends affect stock price
The majority of managers believe that dividend The majority of managers believe that dividend policy is importantpolicy is important
There are tax disadvantages to paying dividendsThere are tax disadvantages to paying dividends Almost all companies pay regular dividendsAlmost all companies pay regular dividends Dividend Policy is a "puzzle" to academic Dividend Policy is a "puzzle" to academic
researchersresearchers
61Dividends in PracticeDividends in PracticeWhat determines dividends?What determines dividends?
There may be legal restrictions on dividendsThere may be legal restrictions on dividendsState laws have restrictions on dividends if company is not
financially soundBond and Preferred Stock contracts may restrict dividends
Liquidity PositionLiquidity PositionThe firm must have sufficient cashcash to pay the dividend
Sources of FinancingSources of FinancingSmall firms may not be able to easily raise money in the capital
markets so they will have low dividendsEarnings PredictabilityEarnings Predictability
Firms with stable earnings typically pays higher dividends as it expects to have future profits needed to pay dividend
62Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
63Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
64Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
1994 1995 1996EPS $2.00 $5.00 $3.00Dividend
65Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
1994 1995 1996EPS $2.00 $5.00 $3.00Dividend $0.80
2.00 x .40 2.00 x .40
66Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
1994 1995 1996EPS $2.00 $5.00 $3.00Dividend $0.80 $2.00
5.00 x .40 5.00 x .40
67Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
1994 1995 1996EPS $2.00 $5.00 $3.00Dividend $0.80 $2.00 $1.20
3.00 x .40 3.00 x .40
68Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend Payout Ratioevery year firm pays the same percentage of earnings as a dividend to shareholders
Example:Firm pays a constant 40% dividend annually
1994 1995 1996EPS $2.00 $5.00 $3.00Dividend $0.80 $2.00 $1.20
Dollar dividend fluctuates every year
69Alternative Dividend PoliciesAlternative Dividend Policies
Stable Dollar DividendDividend does not change quickly: small increases in dollar dividend when management is certain higher dividend can be maintained.
70Alternative Dividend PoliciesAlternative Dividend Policies
Stable Dollar DividendDividend does not change quickly: small increases in dollar dividend when management is certain higher dividend can be maintained.
Example:1991 1992 1993 1994 1995 1996
EPS $2.00 $2.20 $2.10 $3.00 $2.90 $3.10Dividend
71Alternative Dividend PoliciesAlternative Dividend Policies
Stable Dollar DividendDividend does not change quickly: small increases in dollar dividend when management is certain higher dividend can be maintained.
Example:1991 1992 1993 1994 1995 1996
EPS $2.00 $2.20 $2.10 $3.00 $2.90 $3.10Dividend $0.80 $0.80 $0.80 $0.80 $0.80 $1.20
72Alternative Dividend PoliciesAlternative Dividend Policies
Stable Dollar DividendDividend does not change quickly: small increases in dollar dividend when management is certain higher dividend can be maintained.
Example:1991 1992 1993 1994 1995 1996
EPS $2.00 $2.20 $2.10 $3.00 $2.90 $3.10Dividend $0.80 $0.80 $0.80 $0.80 $0.80 $1.20
Increase dividend in 1996 when EPS levels out around $3.00
Increase dividend in 1996 when EPS levels out around $3.00
73Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend PayoutConstant Dividend PayoutStable Dollar DividendStable Dollar DividendSmall regular dividend plus year-end extra paymentSmall regular dividend plus year-end extra payment
Regular dividend is small, if earnings permit pay an extra dividend at end of year
SummarySummary
74Alternative Dividend PoliciesAlternative Dividend Policies
Constant Dividend PayoutConstant Dividend PayoutStable Dollar DividendStable Dollar DividendSmall regular dividend plus year-end extra paymentSmall regular dividend plus year-end extra payment
Regular dividend is small, if earnings permit pay an extra dividend at end of year
Most popular method is the Stable Dollar DividendMost popular method is the Stable Dollar Dividend
SummarySummary
75Dividend Payment ProceduresDividend Payment Procedures
Dividends are usually paid quarterlyDividends are usually paid quarterly
76Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
77Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
Declaration DateDeclaration Date
25 31 1 5 9 15
AugustAugust SeptemberSeptember
Date that dividend is announced
Date that dividend is announced
78Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
Date of Record
Date of Record
Declaration DateDeclaration Date
25 31 1 5 9 15
AugustAugust SeptemberSeptember
All owners of record will receive the dividend.
All owners of record will receive the dividend.
79Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
Declaration DateDeclaration Date
25 31 1 5 9 15
AugustAugust SeptemberSeptember
Date of Record
Date of Record
- 4 days- 4 days
80Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
Date of Record
Date of Record
Declaration DateDeclaration Date Ex-Dividend DateEx-Dividend Date
25 31 1 5 9 15
AugustAugust SeptemberSeptember
To allow time for the official list of stockholders to be updated, stockholders must buy stock before the ex-dividend ex-dividend datedate (4 days prior to date of record)
To allow time for the official list of stockholders to be updated, stockholders must buy stock before the ex-dividend ex-dividend datedate (4 days prior to date of record)
81Dividend Payment ProceduresDividend Payment Procedures
ExampleExample
On August 25, 1995 Southside Bankshares announced a quarterly dividend of $1 per share to be paid to share holders on record September 9, 1995, payable September 15, 1995
Dividends are usually paid quarterlyDividends are usually paid quarterly
Payable Date
Payable Date
Date of Record
Date of Record
Declaration DateDeclaration Date Ex-Dividend DateEx-Dividend Date
25 31 1 5 9 15
AugustAugust SeptemberSeptember
Date that the dividend is paid out to the stockholders.
Date that the dividend is paid out to the stockholders.
82Stock Dividends and SplitsStock Dividends and Splits
Stock DividendsStock Dividends Company issues new shares and sends them on Company issues new shares and sends them on
a pro rata basis to current shareholders instead a pro rata basis to current shareholders instead of using cash to pay a dividendof using cash to pay a dividend
83Stock Dividends and SplitsStock Dividends and Splits
Company issues new shares and sends them on Company issues new shares and sends them on a pro rata basis to current shareholders instead a pro rata basis to current shareholders instead of using cash to pay a dividendof using cash to pay a dividend
Number of shares increase, no money is Number of shares increase, no money is collected or paid by the companycollected or paid by the company
84Stock Dividends and SplitsStock Dividends and Splits
Company issues new shares and sends them on Company issues new shares and sends them on a pro rata basis to current shareholders instead a pro rata basis to current shareholders instead of using cash to pay a dividendof using cash to pay a dividend
Number of shares increase, no money is Number of shares increase, no money is collected or paid by the companycollected or paid by the company
With a 10% stock dividend, an investor will With a 10% stock dividend, an investor will receive one tenth of a share for every share receive one tenth of a share for every share owned.owned.
87Stock Dividends and SplitsStock Dividends and Splits
Company issues new shares and sends them on Company issues new shares and sends them on a pro rata basis to current shareholders instead a pro rata basis to current shareholders instead of using cash to pay a dividendof using cash to pay a dividend
Number of shares increase, no money is Number of shares increase, no money is collected or paid by the companycollected or paid by the company
With a 10% stock dividend, an investor will With a 10% stock dividend, an investor will receive one tenth of a share for every share receive one tenth of a share for every share owned.owned.
If company issues more than a 25% stock If company issues more than a 25% stock dividend it is considered a stock splitdividend it is considered a stock split Only difference between a stock dividend and stock
split is accounting treatment on the balance sheet.
88Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.
89Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.
Investors will receive one-half a share for every share outstandingInvestors will receive one-half a share for every share outstanding
90Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.
Investors will receive one-half a share for every share outstandingInvestors will receive one-half a share for every share outstanding
No new money going into the firm so overall the stock will still be worth $50 x 100,000 = $5 million
91Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.
Investors will receive one-half a share for every share outstandingInvestors will receive one-half a share for every share outstanding
No new money going into the firm so overall the stock will still be worth $50 x 100,000 = $5 million
Each share will be worth $5 million 150,000 shares
= $33.33
92Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock dividend. Before the dividend Katie has 100,000 shares of stock outstanding at a price of $50 per share.
Investors will receive one-half a share for every share outstandingInvestors will receive one-half a share for every share outstanding
No new money going into the firm so overall the stock will still be worth $50 x 100,000 = $5 million
Each share will be worth $5 million 150,000 shares
= $33.33
Alternative way to solve: Price before div 1 + % dividend
$50 1 + .50
= $33.33=
93Rationale for Stock Split or DividendRationale for Stock Split or Dividend
Are Investors Better Off? Are Investors Better Off? ExampleExample
Katie Corporation announces a 50% stock split. Before the split Katie has 100,000 shares of stock outstanding at a price of $50 per share.
Investors will receive one-half a share for every share outstandingInvestors will receive one-half a share for every share outstanding
No new money going into the firm so overall the stock will still be worth $50 x 100,000 = $5 million
Investors are no better off, have 50% more shares of stock, each share is worth less.Investors are no better off, have 50% more shares of stock, each share is worth less.
Alternative way to solve: Price before div 1 + % dividend
$50 1 + .50
= $33.33=
Each share will be worth $5 million 150,000 shares
= $33.33
94Rationale for Stock Split or DividendRationale for Stock Split or Dividend
If Investors wealth is not increased, why issue stock If Investors wealth is not increased, why issue stock dividends? dividends?
Optimal Price RangeOptimal Price RangeSome managers believe stock price should not be too high
an will split the stock or reduce the dividend to reduce the price
InformationInformationStock splits and dividends are seen as a signal that the
company is growingCash Dividend SubstituteCash Dividend Substitute
Companies who do not have cash available to pay a regular dividend may issue a stock dividend instead
95Stock RepurchasesStock Repurchases
Repurchase as an alternative to dividendRepurchase as an alternative to dividendInvestors who sell shares receive cash -- must pay taxes on any capital
gain. Investors who do not want cash simple do not sell sharesCompany pays excess cash to stockholders.
Repurchase as a financing methodRepurchase as a financing methodFirm may issue debt and then repurchase stockThis would result in a higher debt ratio
Repurchase as an investment decisionRepurchase as an investment decisionIf management thinks that their stock price is too low, may buy back its
own stock
Company buys back its own stock from investors
96Stock Repurchase ProcedureStock Repurchase Procedure
Market PurchaseMarket PurchaseFirm buys its own shares through a broker at the
market price.
97Stock Repurchase ProcedureStock Repurchase Procedure
Market PurchaseMarket PurchaseFirm buys its own shares through a broker at the
market price.Tender OfferTender Offer
Company announces it will repurchase shares at a fixed price.
Must announce a price above the current market price to induce shareholders to sell
Must announce a price above the current market price to induce shareholders to sell
98Stock Repurchase ProcedureStock Repurchase Procedure
Market PurchaseMarket PurchaseFirm buys its own shares through a broker at the market price.
Tender OfferTender OfferCompany announces it will repurchase shares at a fixed price.
Negotiated OfferNegotiated OfferCompany negotiates buying stock from specific group of
stockholders.Often done to buy out dissident shareholders.
99Stock Repurchase ProcedureStock Repurchase Procedure
Market PurchaseMarket PurchaseFirm buys its own shares through a broker at the market price.
Tender OfferTender OfferCompany announces it will repurchase shares at a fixed price.
Negotiated OfferNegotiated OfferCompany negotiates buying stock from specific group of
stockholders.Often done to buy out dissident shareholders.
Greenmail Greenmail - Dissident shareholders ask management to buy their shares at an inflated price or dissidents will take over the firm
Greenmail Greenmail - Dissident shareholders ask management to buy their shares at an inflated price or dissidents will take over the firm
100