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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
16-16-33
FIGURE 16.1 DIVIDEND AND STOCK REPURCHASES
16-16-44
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
16-16-66
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)
16-16-88
FIGURE 16.3 DIVIDEND POLICY SURVEY 2004
16-16-99
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
16-16-1010
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
16-16-1111
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
16-16-1212
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
16-16-1313
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
16-16-1414
16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
16-16-1515
16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
16-16-1616
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
16-16-1717
16-3 DIVIDENDS OR REPURCHASES? PAYOUT CONTROVERSY
16-16-1818
FIGURE 16.4 DIVIDEND POLICY
16-16-1919
FIGURE 16.5 DIVIDEND POLICY
16-16-2020
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
16-16-2121
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
16-16-2222
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
16-16-2323
TABLE 16.1 TAXES DIVIDEND POLICY
Returns to Shareholders Taxed Twice
16-16-2424
TABLE 16.2 TAXES DIVIDEND POLICY
Australian Tax Credit to Shareholders