Chapter Brealey, Myers, and Allen Principles of Corporate Finance 11 th Global Edition PAYOUT POLICY 16
Dec 21, 2015
Chapter
Brealey, Myers, and Allen
Principles of Corporate Finance
11th Global Edition
PAYOUT POLICY
16
16-16-22
16-1 FACTS ABOUT PAYOUT
• Cash Dividend versus Stock Repurchase• Cash Dividend
• Dividends are rarely cut back, managers do not increase dividends unless confident that dividend can be maintained
• Stock Repurchase
• Repurchases are more flexible and repurchases are tax-advantaged
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FIGURE 16.1 DIVIDEND AND STOCK REPURCHASES
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16-1 FACTS ABOUT PAYOUT
• Dividend Payments• Cash Dividend
• Payment of cash by firm to shareholders
• Ex-Dividend Date
• Date that determines when stockholder is entitled to dividend payment
• Record Date
• Person who owns stock on this date receives dividend
16-16-55
16-1 FACTS ABOUT PAYOUT
• Dividend Payments• Stock Dividend
• Distribution of additional shares to firm’s stockholders
• Stock Splits
• Issue of additional shares to firm’s stockholders
• Stock Repurchase
• Firm buys back stock from its shareholders
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FIGURE 16.2 EXXON MOBIL'S DIVIDEND
Exxon Mobildeclares quarterly dividend
of $.42 per share
Shares start to
trade ex- dividend
Dividend will be paid
to shareholdersregistered
on this date
Dividend checksmailed
to shareholders
January 5, 2012
February 8, 2012
February 10, 2012
March 9, 2012
Declaration date
Ex-dividend date
Recorddate
Paymentdate
16-16-77
16-1 FACTS ABOUT PAYOUT• Types of Dividends
• Cash Dividend
• Regular Cash Dividend
• Special Cash Dividend
• Stock Dividend
• Stock Repurchase (4 methods)
• Buy Shares on Market
• Tender Offer to Shareholders
• Dutch Auction
• Private Negotiation (greenmail)
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FIGURE 16.3 DIVIDEND POLICY SURVEY 2004
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16-2 INFORMATION CONTENT OF DIVIDEND AND REPURCHASES
• Payout Decision• Managers are reluctant to make dividend changes that may be reversed
• Managers worry about rescinding dividend increases and raising new funds to maintain payout
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16-2 INFORMATION CONTENT OF DIVIDEND AND REPURCHASES
• Payout Decision• To avoid risk of reduction in payout, managers “smooth” dividends
• Dividend changes follow shifts in long-run sustainable earnings
• Transitory earnings changes unlikely to affect dividend payouts
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16-2 INFORMATION CONTENT OF DIVIDEND AND REPURCHASES
• Payout Decisions • Managers focus on dividend changes over absolute levels
• Paying a dividend of $2.00 per share is important if last year's dividend was $1.50
• Paying a dividend of $2.00 is not important if last year's dividend was $2.00
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16-2 INFORMATION CONTENT OF DIVIDEND AND REPURCHASES
• Information Content of Dividends • Dividend stock repurchase decisions contain information
• Asymmetric information may be conveyed
• Dividend increases could mean overpriced stock or increased future profits
• Signal varies based on prior information about company
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16-2 INFORMATION CONTENT OF DIVIDEND AND REPURCHASES
• Information in Payouts• Varying attitudes toward dividend targets
• DIV1 = target dividend
= target ratio × EPS1
• Dividend change
• DIV1 – DIV0 = target change
= target ratio × EPS1 – DIV0
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16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
16-16-1515
16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
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16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
• Important Repurchases• Calculate Market Capitalization
• Done by forecasting and discounting free cash flow paid to shareholders
• To calculate share price, divide market capitalization by number of outstanding shares
• Calculate Value of Dividends Per Share
• Account for increased dividend growth rate per share
• Caused by declining number of shares as shares are repurchased
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16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
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FIGURE 16.4 DIVIDEND POLICY
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FIGURE 16.5 DIVIDEND POLICY
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16-4 THE RIGHTISTS
• Dividend Theories• Leftists
• Dividends do not affect value
• Rightists
• Dividends increase value
• Middle of Roaders
• Leftist theory with some reality thrown in
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16-4 THE RIGHTISTS
• Dividends Increase Value • Dividend increases send good news about cash-flow earnings
• Dividend cuts send bad news
• High-dividend payout policy will be costly to firms that do not have cash flow to support it
• Dividend increases signal company’s good fortune
• Increase in manager’s confidence in future cash flow
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16-5 TAXES AND RADICAL LEFT
• Taxes and Dividend Policy • Capital gains taxed at lower rate than dividend income so companies should pay lowest dividend possible
• Dividend policy should adjust to changes in tax code
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TABLE 16.1 TAXES DIVIDEND POLICY
Returns to Shareholders Taxed Twice
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TABLE 16.2 TAXES DIVIDEND POLICY
Australian Tax Credit to Shareholders