1、Dividends and Other PayoutsKey Concepts and Skills Understand dividend types and how they are paid Understand the issues surrounding dividend policy decisions Understand why share repurchases are an alternative to dividends Understand the difference between cash and stock dividendsChapter Outline18.
2、1 Different Types of Dividends18.2 Standard Method of Cash Dividend Payment18.3 The Benchmark Case:An Illustration of the Irrelevance of Dividend Policy18.4Repurchase of Stock18.5 Personal Taxes and Dividends18.6 Real-World Factors Favoring a High Dividend Policy18.7 The Clientele Effect:A Resolutio
3、n of Real-World Factors?18.8 What We Know and Do Not Know about Dividend Policy18.9Stock Dividends and Stock Splits18.1 Different Types of Dividends Many companies pay a regular cash dividend.Public companies often pay quarterly.Sometimes firms will pay an extra cash dividend.The extreme case would
4、be a liquidating dividend.Companies will often declare stock dividends.No cash leaves the firm.The firm increases the number of shares outstanding.Some companies declare a dividend in kind.Wrigleys Gum sends a box of chewing gum.Dundee Crematoria offers shareholders discounted cremations.18.2 Standa
5、rd Method of Cash DividendRecord Date Date on which company determines existing shareholders.Ex-Dividend Date-Date that determines whether a stockholder is entitled to a dividend payment;anyone holding stock immediately before this date is entitled to a dividend.Cash Dividend-Payment of cash by the
6、firm to its shareholders.Procedure for Cash Dividend25 Oct.1 Nov.2 Nov.5 Nov.7 Dec.Declaration DateCum-dividend DateEx-dividend DateRecord DatePayment DateDeclaration Date:The Board of Directors declares a payment of dividends.Cum-Dividend Date:Buyer of stock still receives the dividend.Ex-Dividend
7、Date:Seller of the stock retains the dividend.Record Date:The corporation prepares a list of all individuals believed to be stockholders as of 5 November.Price Behavior In a perfect world,the stock price will fall by the amount of the dividend on the ex-dividend date.$P$P-divEx-dividend DateThe pric
8、e drops by the amount of the cash dividend.-t -2-10+1+2 Taxes complicate things a bit.Empirically,the price drop is less than the dividend and occurs within the first few minutes of the ex-date.18.3 The Irrelevance of Dividend Policy A compelling case can be made that dividend policy is irrelevant.S
9、ince investors do not need dividends to convert shares to cash;they will not pay higher prices for firms with higher dividends.In other words,dividend policy will have no impact on the value of the firm because investors can create whatever income stream they prefer by using homemade dividends.Homem
10、ade DividendsBianchi Inc.is a$42 stock about to pay a$2 cash dividend.Bob Investor owns 80 shares and prefers a$3 dividend.Bobs homemade dividend strategy:Sell 2 shares ex-dividend homemade dividendsCash from dividend$160Cash from selling stock$80Total Cash$240Value of Stock Holdings$40 78=$3,120$3
11、Dividend$240$0$240$39 80=$3,120Dividend Policy is Irrelevant In the above example,Bob Investor began with a total wealth of$3,360:share42$shares 80360,3$240$share39$shares 80360,3$80$160$share40$shares 78360,3$After a$3 dividend,his total wealth is still$3,360:After a$2 dividend and sale of 2 ex-div
12、idend shares,his total wealth is still$3,360:Dividends and Investment Policy Firms should never forgo positive NPV projects to increase a dividend(or to pay a dividend for the first time).Recall that one of the assumptions underlying the dividend-irrelevance argument is:“The investment policy of the
13、 firm is set ahead of time and is not altered by changes in dividend policy.”18.4 Repurchase of Stock Instead of declaring cash dividends,firms can rid themselves of excess cash through buying shares of their own stock.Recently,share repurchase has become an important way of distributing earnings to
14、 shareholders.Stock Repurchase versus Dividend$10=/100,000$1,000,000=Price per share100,000=outstanding Shares1,000,000Value of Firm1,000,000Value of Firm1,000,000Equity850,000 AssetsOther 0Debt$150,000Cashsheet balance Original A.Equity&Liabilities AssetsConsider a firm that wishes to distribute$10
15、0,000 to its shareholders.Stock Repurchase versus Dividend$9=00,000$900,000/1=shareper Price100,000=goutstandin Shares900,000Firm of Value900,000Firm of Value900,000Equity850,000AssetsOther 0Debt$50,000Cashdividendcash shareper$1After B.Equity&sLiabilitie AssetsIf they distribute the$100,000 as a ca
16、sh dividend,the balance sheet will look like this:Stock Repurchase versus DividendAssets Liabilities&EquityC.After stock repurchaseCash$50,000Debt0Other Assets850,000Equity900,000Value of Firm 900,000Value of Firm 900,000Shares outstanding=90,000Price per share=$900,000/90,000=$10If they distribute
17、the$100,000 through a stock repurchase,the balance sheet will look like this:Share Repurchase Flexibility for shareholders Keeps stock price higher Good for insiders who hold stock options As an investment of the firm(undervaluation)Tax benefits 18.5 Personal Taxes and Dividends To get the result th
18、at dividend policy is irrelevant,we needed three assumptions:No taxes No transactions costs No uncertainty In the United States,both cash dividends and capital gains are taxed at a maximum rate of 15 percent.Since capital gains can be deferred,the tax rate on dividends is greater than the effective
19、rate on capital gains.Firms without Sufficient Cash In a world of personal taxes,firms should not issue stock to pay a dividend.FirmStock Holders Cash:stock issueCash:dividendsGov.TaxesInvestment BankersThe direct costs of stock issuance will add to this effect.Firms with Sufficient Cash The above a
20、rgument does not necessarily apply to firms with excess cash.Consider a firm that has$1 million in cash after selecting all available positive NPV projects.Select additional capital budgeting projects(by assumption,these are negative NPV).Acquire other companies Purchase financial assets Repurchase
21、sharesTaxes and DividendsIn the presence of personal taxes:A firm should not issue stock to pay a dividend.Managers have an incentive to seek alternative uses for funds to reduce dividends.1.Though personal taxes mitigate against the payment of dividends,these taxes are not sufficient to lead firms
22、to eliminate all dividends.18.6 Real-World Factors Favoring High Dividends Desire for Current Income Behavioral Finance It forces investors to be disciplined.Tax Arbitrage Investors can create positions in high dividend yield securities that avoid tax liabilities.Agency Costs High dividends reduce f
23、ree cash flow.18.7 The Clientele Effect Clienteles for various dividend payout policies are likely to form in the following way:GroupStock TypeHigh Tax Bracket IndividualsLow Tax Bracket IndividualsTax-Free InstitutionsCorporations Zero-to-Low payoutLow-to-Medium payoutMedium payoutHigh payoutOnce t
24、he clienteles have been satisfied,a corporation is unlikely to create value by changing its dividend policy.18.8 What We Know and Do Not Know Corporations“smooth”dividends.Fewer companies are paying dividends.Dividends provide information to the market.Firms should follow a sensible policy:Do not fo
25、rgo positive NPV projects just to pay a dividend.Avoid issuing stock to pay dividends.Consider share repurchase when there are few better uses for the cash.18.9 Stock Dividends Pay additional shares of stock instead of cash Increases the number of outstanding shares Small stock dividend Less than 20
26、 to 25%If you own 100 shares and the company declared a 10%stock dividend,you would receive an additional 10 shares.Large stock dividend more than 20 to 25%Stock Splits Stock splits essentially the same as a stock dividend except it is expressed as a ratio For example,a 2 for 1 stock split is the sa
27、me as a 100%stock dividend.Stock price is reduced when the stock splits.Common explanation for split is to return price to a“more desirable trading range.”Quick Quiz What are the different types of dividends,and how is a dividend paid?What is the clientele effect,and how does it affect dividend policy irrelevance?What is the information content of dividend changes?What are stock dividends,and how do they differ from cash dividends?How are share repurchases an alternative to dividends,and why might investors prefer them?
