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Dividend Fundamentals
Relevant dates for dividend payments
Announcement date
The day the firm announces the dividend, dividend record, and payment dates
Date of record
All persons recorded as stockholders on this date receive the declared dividend. The persons that buy the stock before ex dividend date will receive the current dividend. Several business days before date of record
Ex dividend date
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In states where legal capital includes all paid-in capital, maximum payout is $140,000 (only Retained Earnings).
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Types of Dividends
Cash dividends Types of dividend policies Stock dividends and stock splits
Regular Cash Dividend Special Cash Dividend National differences in payment methods Constant payout ratio policy Constant nominal payments (standard worldwide) Low regular and extra dividend Stock dividend: payment of a dividend in the form of stock Stock splits affect firms shares similarly to stock dividends. Buying shares on the market Tender Offer to Shareholders Private Negotiation (Green Mail)
Stock repurchases
Within industries, dividend payout tends to be directly related to asset intensity and the presence of regulation. Almost all firms maintain constant nominal dividend payments per share for long periods of time.
90 80 70 60 50 40 30 20 10 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 2000
Source: Statistical Abstract of United States, U.S department of Commerce, various issues (1972-2001)
Payout Ratio Industry 0% 0 2 7 14 15 20 28 28 39 Household non-durables Industrial metals Pharmaceuticals Banking Basic chemicals Foods & non-alcohol bev Autos & auto parts Electric utilities Alcohol bev & tobacco Oil & gas product & mktg
It is unclear how dividends affect the required return on a firm's common stock.
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Mainstream favorite: the agency cost/contracting model The signaling model of dividends: firms pay dividends to burn money, separate from weaker rivals
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Based on investment opportunity set: mature firms have high payout; high-growth firms have low payouts.
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Miller & Modigliani showed this the same way that they proved that capital structure was irrelevant. Value is determined solely by investment policy and profitability of the firms assets.
Two identical companies, except their dividend policy. Both have 4 millions shares outstanding. Both companies have assets worth $40 million. Expected net cash inflow is $6 million next year.
Adams Construction
Return on investment Price per share 15% $10
Both firms anticipate an investment opportunity next year that will require $6 million. How will the two firms finance this opportunity?
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Adams Construction
Pays out 100% of next years cash inflows as dividends. Earns and distributes $1.50/share Will raise $6 million in a new equity offering to finance the new investment opportunity
600,000 shares at $10 each
Today Tomorrow
Adams Construction original shareholders earn 15% return in the form of dividend.
Shareholders earn required return of 15% in the form of stock price increase.
Firm value for both firms is the same, regardless of the dividend payout policy!
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Will allow payout to vary in the short term to keep $ dividends the same. Will only raise $ dividend if permanent earnings increase. Will only cut $ dividend if firm facing financial disaster.
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Managerial reluctance to change nominal dividend payment gives rise to partial adjustment model.