Post on 19-Oct-2015
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Aswath D
amodaran
127
Returning C
ash to the Ow
ners:D
ividend Policy
Asw
ath Dam
odaran
Aswath D
amodaran
128
First P
rinciples
QInvest in projects that yield a return greater than the m
inimum
acceptable hurdle rate.
The hurdle rate should be higher for riskier projects and reflect the
financing mix used - ow
ners funds (equity) or borrowed m
oney (debt)
R
eturns on projects should be measured based on cash flow
s generatedand the tim
ing of these cash flows; they should also consider both positive
and negative side effects of these projects.
QC
hoose a financing mix that m
inimizes the hurdle rate and m
atches theassets being financed.
QIf there are not enough investm
ents that earn the hurdle rate,return the cash to stockholders.
The form
of returns - dividends and stock buybacks - will depend
upon the stockholders characteristics.
Objective: M
aximize the V
alue of the Firm
Aswath D
amodaran
129
Dividends are sticky
Dividend C
hanges : 1989-1998
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
19891990
19911992
19931994
19951996
19971998
Year
% of all firms
Increasing dividendsD
ecreasing dividendsN
ot changing dividends
Aswath D
amodaran
130
Dividends tend to follow
earnings
Figure 21.5: Dividends and Earnings at US Firms: 1960 - 1998
0.0
0
5.0
0
10
.00
15
.00
20
.00
25
.00
30
.00
35
.00
40
.00
45
.00
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
$ Dividends/Earnings
Earnings
Dividends
Aswath D
amodaran
131
More and m
ore firms are buying back stock,
rather than pay dividends...
Fig
ure
2
2.1
: S
toc
k
Bu
yb
ac
ks
a
nd
D
ivid
en
ds
: A
gg
reg
ate
fo
r U
S
Firm
s
- 1
98
9-9
8
$-
$5
0,0
00
.00
$1
00
,00
0.0
0
$1
50
,00
0.0
0
$2
00
,00
0.0
0
$2
50
,00
0.0
0
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
Ye
ar
Stock B
uybacksD
ivide
nd
s
Aswath D
amodaran
132
Measures of D
ividend Policy
QD
ividend Payout:
measures the percentage of earnings that the com
pany pays in dividends
=
Dividends / E
arnings
QD
ividend Yield
:
measures the return that an investor can m
ake from dividends alone
=
Dividends / Stock Price
Aswath D
amodaran
133
Dividend P
ayout Ratios: January 2002
0
20
40
60
80
100
120
140
160
180
0-5%
5-10%
10-15%
15-20%
20-25%
25-30%
30-35%
35-40%
40-45%
45-50%
50-60%
60-70%
70-80%
80-90%
90-100%
>100%
Div
iden
d P
ayo
ut R
atio
s: Jan
uary
20
02
Firm
s paying/not paying dividends
0
500
1000
1500
2000
2500
Pay divid
ends
Pay no d
ividen
ds
Number of firms
Aswath D
amodaran
134
Dividend Y
ields in the United S
tates: January2002
0
50
100
150
200
2500-0.25%
0.25-0.5%0.5-0.75%
0.75-%
1-1.25%
1-1.5%1.5-1.75%
1.75-2%
2-2.5%
2.5-3%
3-3.5%
3.5-4%
4-5%
>5%
Div
iden
d Y
ield
s: Jan
uary
20
02
Num
ber o
f divid
end Payin
g firm
s = 1
800
Num
ber o
f non-d
ividen
d Payin
g firm
s = 3
971
Aswath D
amodaran
135
Three S
chools Of T
hought On D
ividends
Q1. If
(a) there are no tax disadvantages associated with dividends
(b) com
panies can issue stock, at no cost, to raise equity, whenever
needed
D
ividends do not matter, and dividend policy does not affect value.
Q2. If dividends have a tax disadvantage,
D
ividends are bad, and increasing dividends will reduce value
Q3. If stockholders like dividends, or dividends operate as a signal of future prospects,
D
ividends are good, and increasing dividends will increase value
Aswath D
amodaran
136
The balanced view
point
QIf a com
pany has excess cash, and few good projects (N
PV>
0),returning m
oney to stockholders (dividends or stock repurchases) isG
OO
D.
QIf a com
pany does not have excess cash, and/or has several goodprojects (N
PV>
0), returning money to stockholders (dividends or
stock repurchases) is BA
D.
Aswath D
amodaran
137
Why do firm
s pay dividends?
QT
he Miller-M
odigliani Hypothesis: D
ividends do not affect valueQ
Basis:
If a firm's investm
ent policy (and hence cash flows) don't change, the
value of the firm cannot change w
ith dividend policy. If we ignore
personal taxes, investors have to be indifferent to receiving eitherdividends or capital gains.
QU
nderlying Assum
ptions:
(a) There are no tax differences betw
een dividends and capital gains.
(b) If com
panies pay too much in cash, they can issue new
stock, with no
flotation costs or signaling consequences, to replace this cash.
(c) If com
panies pay too little in dividends, they do not use the excesscash for bad projects or acquisitions.
Aswath D
amodaran
138
The T
ax Response: D
ividends are taxed more
than capital gains
QB
asis:
Dividends are taxed m
ore heavily than capital gains. A stockholder w
illtherefore prefer to receive capital gains over dividends.
QE
vidence:
Exam
ining ex-dividend dates should provide us with som
e evidence onw
hether dividends are perfect substitutes for capital gains.
Aswath D
amodaran
139
Price B
ehavior on Ex-D
ividend Date
Let P
b = Price before the stock goes ex-dividend
Pa =
Price after the stock goes ex-dividend D
= D
ividends declared on stock to , tcg =
Taxes paid on ordinary incom
e and capital gains respectively
$ Pb$Pa
______________|_______ Ex-Dividend Day _______________|
Aswath D
amodaran
140
Cashflow
s from S
elling around Ex-D
ividendD
ay
QT
he cash flows from
selling before then are-P
b - (Pb - P) tcg
QT
he cash flows from
selling after the ex-dividend day are-P
a - (Pa - P) tcg +
D(1-to )
Since the average investor should be indifferent between selling before
the ex-dividend day and selling after the ex-dividend day -P
b - (Pb - P) tcg =
Pa - (P
a - P) tcg + D
(1-to )M
oving the variables around, we arrive at the follow
ing:
Aswath D
amodaran
141
Price C
hange, Dividends and T
ax Rates
IfP
b - Pa =
Dthen
to = tcg
Pb - P
a < D
then to >
tcgP
b - Pa >
Dthen
to < tcg
Pb
Pa
D =
(1
-to )
(1 t
cg )
Aswath D
amodaran
142
The E
vidence on Ex-D
ividend Day B
ehavior
OrdinaryInco
meCapital
Gains(
Pb-
Pa )/D
Before1981
70%
28%
0.78(1966-69)
1981-8550
%20
%0.85
1986-199028
%28
%0.90
1991-199333
%28
%0.92
1994..39.6
%28
%0.90
Aswath D
amodaran
143
Dividend A
rbitrage
QA
ssume that you are a tax exem
pt investor, and that you know that the
price drop on the ex-dividend day is only 90% of the dividend. H
oww
ould you exploit this differential?
RInvest in the stock for the long term
RSell short the day before the ex-dividend day, buy on the ex-dividendday
RB
uy just before the ex-dividend day, and sell after.
R______________________________________________
Aswath D
amodaran
144
Exam
ple of dividend capture strategy with tax
factors
QX
YZ
company is selling for $50 at close of trading M
ay 3. On M
ay 4,X
YZ
goes ex-dividend; the dividend amount is $1. T
he price drop(from
past examination of the data) is only 90%
of the dividendam
ount.
QT
he transactions needed by a tax-exempt U
.S. pension fund for thearbitrage are as follow
s:
1. Buy 1 m
illion shares of XY
Z stock cum
-dividend at $50/share.
2. W
ait till stock goes ex-dividend; Sell stock for $49.10/share (50 - 1*0.90)
3. C
ollect dividend on stock.
QN
et profit = - 50 m
illion + 49.10 m
illion + 1 m
illion = $0.10 m
illion
Aswath D
amodaran
145
The w
rong reasons for paying dividendsT
he bird in the hand fallacy
QA
rgument: D
ividends now are m
ore certain than capital gains later.H
ence dividends are more valuable than capital gains.
QC
ounter: The appropriate com
parison should be between dividends
today and price appreciation today. (The stock price drops on the ex-
dividend day.)
Aswath D
amodaran
146
The excess cash hypothesis
QA
rgument: T
he firm has excess cash on its hands this year, no
investment projects this year and w
ants to give the money back to
stockholders.
QC
ounter: So why not just repurchase stock? If this is a one-tim
ephenom
enon, the firm has to consider future financing needs.
Consider the cost of issuing new
stock:
Aswath D
amodaran
147
The C
ost of Raising F
unds
QIssuing new
equity is much m
ore expensive than raising new debt for
companies that are already publicly traded, in term
s of transactionscosts and investm
ent banking fees
QR
aising small am
ounts is much m
ore expensive than raising largeam
ounts, for both equity and debt. Making a sm
all equity issue ( say $25-$ 50 m
illion might be prohibitively expensive)
Aswath D
amodaran
148
Are firm
s perverse? Som
e evidence that theyare not
Aswath D
amodaran
149
Evidence from
Canadian F
irms
Com
panyP
remium
for Cash dividend over
Stock Dividend Shares
Consolidated Bathurst19.30%
Donfasco13.30%
Dome Petroleum
0.30%
Imperial Oil
12.10%
New
foundland Light & Pow
er1.80%
Royal Trustco17.30%
Stelco2.70%
TransAlta1.10%
Average
7.54%
Aswath D
amodaran
150
A clientele based explanation
QB
asis: Investors may form
clienteles based upon their tax brackets.Investors in high tax brackets m
ay invest in stocks which do not pay
dividends and those in low tax brackets m
ay invest in dividend payingstocks.
QE
vidence: A study of 914 investors' portfolios w
as carried out to see iftheir portfolio positions w
ere affected by their tax brackets. The study
found that
(a) Older investors w
ere more likely to hold high dividend stocks and
(b) Poorer investors tended to hold high dividend stocks
Aswath D
amodaran
151
Results from
Regression: C
lientele Effect
Dividend Y
ieldt = a + b t + c Aget + d Incom
et + e Differential Tax R
atet + tV
ariableC
oefficientIm
plies
Constant
4.22%
Beta C
oefficient-2.145
Higher beta stocks pay low
er dividends.
Age/100
3.131Firm
s with older investors pay higher
dividends.
Income/1000
-3.726Firm
s with w
ealthier investors pay lower
dividends.
Differential Tax R
ate-2.849
If ordinary income is taxed at a higher rate
than capital gains, the firm pays less
dividends.
Aswath D
amodaran
152
Dividend P
olicy and Clientele
QA
ssume that you run a phone com
pany, and that you have historicallypaid large dividends. Y
ou are now planning to enter the
telecomm
unications and media m
arkets. Which of the follow
ing pathsare you m
ost likely to follow?
RC
ourageously announce to your stockholders that you plan to cutdividends and invest in the new
markets.
RC
ontinue to pay the dividends that you used to, and defer investment
in the new m
arkets.
RC
ontinue to pay the dividends that you used to, make the investm
entsin the new
markets, and issue new
stock to cover the shortfall
RO
ther
Aswath D
amodaran
153
The S
ignaling Hypothesis
Aswath D
amodaran
154
An A
lternative Story..D
ividends as Negative
Signals
Aswath D
amodaran
155
The W
ealth Transfer H
ypothesis
-2
-1.5 -1
-0.5 0
0.5
t:-1
5-1
2-9
-6-3
03
69
12
15
CA
R (D
iv Up)
CA
R (D
iv down)
EX
CE
SS
RE
TUR
NS
ON
STR
AIG
HT B
ON
DS
AR
OU
ND
DIV
IDE
ND
CH
AN
GE
S
Day (0: A
nnouncement date)
CAR
Aswath D
amodaran
156
Managem
ent Beliefs about D
ividend Policy
QA
firms dividend payout ratio affects its stock price.
QD
ividend payments operate as a signal to financial m
arkets
QD
ividend announcements provide inform
ation to financial markets.
QInvestors think that dividends are safer than retained earnings
QInvestors are not indifferent betw
een dividends and price appreciation.
QStockholders are attracted to firm
s that have dividend policies that theylike.
Aswath D
amodaran
157
Determ
inants of Dividend P
olicy
QInvestm
ent Opportunities: M
ore investment opportunities - >
Low
erD
ividends
QStability in earnings: M
ore stable earnings -> H
igher Dividends
QA
lternative sources of capital: More alternative sources ->
Higher
Dividends
QC
onstraints: More constraints im
posed by bondholders and lenders ->L
ower D
ividends
QSignaling Incentives: M
ore options to supply information to financial
markets - L
ower need to pay dividends as signal
QStockholder characteristics: O
lder, poorer stockholders -> H
igherdividends
Aswath D
amodaran
158
Questions to A
sk in Dividend P
olicy Analysis
QH
ow m
uch could the company have paid out during the period under
question?
QH
ow m
uch did the the company actually pay out during the period in
question?
QH
ow m
uch do I trust the managem
ent of this company w
ith excesscash?
How
well did they m
ake investments during the period in question?
H
ow w
ell has my stock perform
ed during the period in question?
Aswath D
amodaran
159
A M
easure of How
Much a C
ompany C
ouldhave A
fforded to Pay out: F
CF
E
QT
he Free Cashflow
to Equity (FC
FE) is a m
easure of how m
uch cashis left in the business after non-equity claim
holders (debt and preferredstock) have been paid, and after any reinvestm
ent needed to sustain thefirm
s assets and future growth.
Net Incom
e
+ D
epreciation & A
mortization
= C
ash flows from
Operations to E
quity Investors
- Preferred Dividends
- Capital E
xpenditures
- Working C
apital Needs
- Principal Repaym
ents
+ Proceeds from
New
Debt Issues
= Free C
ash flow to E
quity
Aswath D
amodaran
160
Estim
ating FC
FE
when Leverage is S
table
Net Incom
e
- (1- ) (Capital E
xpenditures - Depreciation)
- (1- ) Working C
apital Needs
= Free C
ash flow to E
quity
= D
ebt/Capital R
atio
For this firm,
Proceeds from
new debt issues =
Principal Repaym
ents + (C
apitalE
xpenditures - Depreciation +
Working C
apital Needs)
Aswath D
amodaran
161
An E
xample: F
CF
E C
alculation
QC
onsider the following inputs for M
icrosoft in 1996. In 1996,M
icrosofts FCFE
was:
N
et Income =
$2,176 Million
C
apital Expenditures =
$494 Million
D
epreciation = $ 480 M
illion
C
hange in Non-C
ash Working C
apital = $ 35 M
illion
D
ebt Ratio =
0%
QFC
FE =
Net Incom
e - (Cap ex - D
epr) (1-DR
) - Chg W
C (!-D
R)
=$ 2,176
- (494 - 480) (1-0)- $ 35 (1-0)
=
$ 2,127 Million
Aswath D
amodaran
162
Microsoft: D
ividends?
QB
y this estimation, M
icrosoft could have paid $ 2,127 Million in
dividends/stock buybacks in 1996. They paid no dividends and bought
back no stock. Where w
ill the $2,127 million show
up in Microsofts
balance sheet?
Aswath D
amodaran
163
Dividends versus F
CF
E: U
.S.
Fig
ure
1
1.1
: D
ivid
en
ds
/FC
FE
:
NY
SE
F
irms
in
1
99
6
0
20
0
40
0
60
0
80
0
10
00
12
00
14
00
16
00
18
00
0 %
0 -10%
10 -20%
20- 30%
30 - 40%
4 0 - 5 0 %
50 - 60%
60 -70%
70 - 80%
80 -90%
90 - 100%
> 100%
Div
ide
nd
s/F
CF
E
Number of Firms
Aswath D
amodaran
164
The C
onsequences of Failing to pay F
CF
E
Ch
rys
ler: F
CF
E, D
ivid
en
ds
an
d C
as
h B
ala
nc
e
($5
00
)
$0
$5
00
$1
,00
0
$1
,50
0
$2
,00
0
$2
,50
0
$3
,00
0
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
Ye
ar
Cash Flow
$0
$1
,00
0
$2
,00
0
$3
,00
0
$4
,00
0
$5
,00
0
$6
,00
0
$7
,00
0
$8
,00
0
$9
,00
0
Cash Balance
= F
ree
CF
to E
qu
ity =
Ca
sh to
Sto
ckho
lde
rsC
umulated C
ash
Aswath D
amodaran
165
A
pplication Test: E
stimating your firm
sF
CF
E
In General,
If cash flow statem
ent usedN
et Income
Net Incom
e+
Depreciation &
Am
ortization+
Depreciation &
Am
ortization- C
apital Expenditures
+ C
apital Expenditures
- Change in N
on-Cash W
orking Capital
+ C
hanges in Non-cash W
C- Preferred D
ividend+
Preferred Dividend
- Principal Repaid
+ Increase in L
T B
orrowing
+ N
ew D
ebt Issued+
Decrease in L
T B
orrowing
+ C
hange in ST B
orrowing
= FCFE
= FCFE
Com
pare toD
ividends (Com
mon)
-Com
mon D
ividend+
Stock Buybacks
- Decrease in
C
apital Stock+ Increase in
Capital Stock
Aswath D
amodaran
166
A P
ractical Fram
ework for A
nalyzing Dividend
Policy
How
much did the firm
pay out? How
much could it have afforded to pay out?
What it could have paid out
What it actually paid out
Net Incom
eD
ividends- (C
ap Ex - D
eprn) (1-DR
)+
Equity R
epurchase- C
hg Working C
apital (1-DR
)= F
CF
E
Firm
pays out too littleF
CF
E > D
ividendsF
irm pays out too m
uchF
CF
E < D
ividends
Do you trust managers in the com
pany withyour cash?Look at past project choice:C
ompare
RO
E to C
ost of Equity
RO
C to W
AC
C
What investm
ent opportunities does the firm
have?Look at past project choice:C
ompare
RO
E to C
ost of Equity
RO
C to W
AC
C
Firm
has history of good project choice and good projects in the future
Firm
has historyof poor project choice
Firm
has good projects
Firm
has poor projects
Give m
anagers the flexibility to keep cash and set dividends
Force m
anagers to justify holding cash or return cash to stockholders
Firm
should cut dividends and reinvest m
ore
Firm
should deal w
ith its investment
problem first and
then cut dividends
Aswath D
amodaran
167
A D
ividend Matrix
FC
FE
- Divid
end
s
Good P
rojectsP
oor Projects
Maxim
umFlexibility in D
ividend Policy
Reduce cash
payout to stockholders
Significant pressureo
n m
an
agers to pay cash out
Investment and
Dividend
problems; cut
dividends but also check project choice
Aswath D
amodaran
168
Disney: A
n analysis of FC
FE
from 1992-1996
Year
Net Incom
e(C
ap Ex- D
epr) C
hg in WC
FC
FE
(1- Debt R
atio)(1-D
ebt Ratio)
1992$817
$173 ($81)
$725
1993$889
$328 $160
$402
1994$1,110
$469 $498
$143
1995$1,380
$325 $206
$849
1996*$1,214
$466 ($470)
$1,218
Avge
$1,082 $352
$63$667
(The num
bers for 1996 are reported without the C
apital Cities
Acquisition)
The debt ratio used to estim
ate the free cash flow to equity w
as estimated
as follows =
Net D
ebt Issues/(Net C
ap Ex +
Change in N
on-cash WC
)
Aswath D
amodaran
169
Disneys D
ividends and Buybacks from
1992 to1996
Year
FCFE
Dividends +
Stock Buybacks
1992$725
$105
1993$402
$160
1994$143
$724
1995$849
$529
1996$1,218
$733
Average
$667 $450
Aswath D
amodaran
170
Disney: D
ividends versus FC
FE
QD
isney paid out $ 217 million less in dividends (and stock buybacks)
than it could afford to pay out. How
much cash do you think D
isneyaccum
ulated during the period?
Aswath D
amodaran
171
Can you trust D
isneys managem
ent?
QD
uring the period 1992-1996, Disney had
an average return on equity of 21.07%
on projects taken
earned an average return on 21.43%
for its stockholders
a cost of equity of 19.09%
QD
isney has taken good projects and earned above-market returns for its
stockholders during the period.
QIf you w
ere a Disney stockholder, w
ould you be comfortable w
ithD
isneys dividend policy?
RY
es
RN
o
Aswath D
amodaran
172
Disney: R
eturn Perform
ance Trends
Re
turn
s o
n E
qu
ity, S
toc
k a
nd
Re
qu
ired
Re
turn
s - D
isn
ey
-10
.00
%
0.0
0%
10
.00
%
20
.00
%
30
.00
%
40
.00
%
50
.00
%
60
.00
%
19
92
19
93
19
94
19
95
19
96
Ye
ar
RO
ER
etu
rns o
n S
tock
Re
qu
ired
Re
turn
Aswath D
amodaran
173
The B
ottom Line on D
isney Dividends
QD
isney could have afforded to pay more in dividends during the period
of the analysis.
QIt chose not to, and used the cash for the A
BC
acquisition.
QT
he excess returns that Disney earned on its projects and its stock over
the period provide it with som
e dividend flexibility. The trend in these
returns, however, suggests that this flexibility w
ill be rapidly depleted.
QT
he flexibility will clearly not survive if the A
BC
acquisition does notw
ork out.
Aswath D
amodaran
174
Aracruz: D
ividends and FC
FE
: 1994-1996
19941995
1996N
et Income
BR
248.21 B
R326.42
BR
47.00 - (C
ap. Exp - D
epr)*(1-DR
)B
R174.76
BR
197.20 B
R14.96
- Working C
apital*(1-DR
)(B
R47.74)
BR
15.67 (B
R23.80)
= Free C
F to Equity
BR
121.19 B
R113.55
BR
55.84
Dividends
BR
80.40 B
R113.00
BR
27.00 +
Equity R
epurchasesB
R 0.00
BR
0.00B
R 0.00
= C
ash to StockholdersB
R80.40
BR
113.00 B
R27.00
Aswath D
amodaran
175
Aracruz: Investm
ent Record
19941995
1996P
roject Perform
ance Measures
RO
E19.98%
16.78%2.06%
Required rate of return
3.32%28.03%
17.78% D
ifference16.66%
-11.25%-15.72%
Stock Perform
ance Measure
Returns on stock
50.82%-0.28%
8.65%R
equired rate of return3.32%
28.03%17.78%
Difference
47.50%-28.31%
-9.13%
Aswath D
amodaran
176
Aracruz: Its your call..
QA
ssume that you are a large stockholder in A
racruz. They have a
history of paying less in dividends than they have available in FCFE
and have accumulated a cash balance of roughly 1 billion B
R (25%
ofthe value of the firm
). Would you trust the m
anagers at Aracruz w
ithyour cash?
RY
es
RN
o
Aswath D
amodaran
177
Mandated D
ividend Payouts
QT
here are many countries w
here companies are m
andated to pay out acertain portion of their earnings as dividends. G
iven our discussion ofFC
FE, w
hat types of companies w
ill be hurt the most by these law
s?
RL
arge companies m
aking huge profits
RSm
all companies losing m
oney
RH
igh growth com
panies that are losing money
RH
igh growth com
panies that are making m
oney
Aswath D
amodaran
178
BP
: Dividends- 1983-92
12
34
56
78
910
Net Incom
e$1,256.00
$1,626.00$2,309.00
$1,098.00$2,076.00
$2,140.00$2,542.00
$2,946.00$712.00
$947.00
- (Cap. E
xp - Depr)*(1-D
R)
$1,499.00$1,281.00
$1,737.50$1,600.00
$580.00$1,184.00
$1,090.50$1,975.50
$1,545.50$1,100.00
Working C
apital*(1-DR
)$369.50
($286.50)$678.50
$82.00($2,268.00)
($984.50)$429.50
$1,047.50($305.00)
($415.00)
= Free C
F to Equity
($612.50)$631.50
($107.00)($584.00)
$3,764.00$1,940.50
$1,022.00($77.00)
($528.50)$262.00
Dividends
$831.00$949.00
$1,079.00$1,314.00
$1,391.00$1,961.00
$1,746.00$1,895.00
$2,112.00$1,685.00
+ E
quity Repurchases
= C
ash to Stockholders$831.00
$949.00$1,079.00
$1,314.00$1,391.00
$1,961.00$1,746.00
$1,895.00$2,112.00
$1,685.00
Dividend R
atios
Payout Ratio
66.16%58.36%
46.73%119.67%
67.00%91.64%
68.69%64.32%
296.63%177.93%
Cash Paid as %
of FCFE
-135.67%150.28%
-1008.41%-225.00%
36.96%101.06%
170.84%-2461.04%
-399.62%643.13%
Perform
ance Ratios
1. Accounting M
easure
RO
E9.58%
12.14%19.82%
9.25%12.43%
15.60%21.47%
19.93%4.27%
7.66%
Required rate of return
19.77%6.99%
27.27%16.01%
5.28%14.72%
26.87%-0.97%
25.86%7.12%
Difference
-10.18%5.16%
-7.45%-6.76%
7.15%0.88%
-5.39%20.90%
-21.59%0.54%
Aswath D
amodaran
179
BP
: Sum
mary of D
ividend Policy
Summ
ary of calculations
Average
Standard Deviation
Maxim
umM
inimum
Free C
F to E
quity$571.10
$1,382.29$3,764.00
($612.50)
Dividends
$1,496.30$448.77
$2,112.00$831.00
Dividends+
Repurchases
$1,496.30$448.77
$2,112.00$831.00
Dividend P
ayout Ratio
84.77%
Cash P
aid as % of F
CF
E262.00%
RO
E - R
equired return-1.67%
11.49%20.90%
-21.59%
Aswath D
amodaran
180
BP
: Just Desserts!
Aswath D
amodaran
181
The Lim
ited: Sum
mary of D
ividend Policy:
1983-1992
Summ
ary of calculations
Average
Standard Deviation
Maxim
umM
inimum
Free C
F to E
quity($34.20)
$109.74$96.89
($242.17)
Dividends
$40.87$32.79
$101.36$5.97
Dividends+
Repurchases
$40.87$32.79
$101.36$5.97
Dividend P
ayout Ratio
18.59%
Cash P
aid as % of F
CF
E-119.52%
RO
E - R
equired return1.69%
19.07%29.26%
-19.84%
Aswath D
amodaran
182
Grow
th Firm
s and Dividends
QH
igh growth firm
s are sometim
es advised to initiate dividends becauseits increases the potential stockholder base for the com
pany (sincethere are som
e investors - like pension funds - that cannot buy stocksthat do not pay dividends) and, by extension, the stock price. D
o youagree w
ith this argument?
RY
es
RN
o
Why?
Aswath D
amodaran
183
A
pplication Test: A
ssessing your firms
dividend policy
QC
ompare your firm
s dividends to its FCFE
, looking at the last 5 yearsof inform
ation.
QB
ased upon your earlier analysis of your firms project choices, w
ouldyou encourage the firm
to return more cash or less cash to its ow
ners?
QIf you w
ould encourage it to return more cash, w
hat form should it
take (dividends versus stock buybacks)?
Aswath D
amodaran
184
Other A
ctions that affect Stock P
rices
QIn the case of dividends and stock buybacks, firm
s change the value ofthe assets (by paying out cash) and the num
ber of shares (in the case ofbuybacks).
QT
here are other actions that firms can take to change the value of their
stockholders equity.
Divestitures: T
hey can sell assets to another firm that can utilize them
more efficiently, and claim
a portion of the value.
Spin offs: In a spin off, a division of a firm is m
ade an independent entity.T
he parent company has to give up control of the firm
.
Equity carve outs: In an E
CO
, the division is made a sem
i-independententity. T
he parent company retains a controlling interest in the firm
.
Tracking Stock: W
hen tracking stock are issued against a division, theparent com
pany retains complete control of the division. It does not have
its own board of directors.
Aswath D
amodaran
185
Differences in these actions
Asset com
pletelycovenrted into cash
No cash for
transaction
Control fully lost
Parent com
panhy preservescontrol
Taxed on capital gains
No T
axes
Bondholders negatively
affected
Bondholders
unaffected
Divestitures
Spin offs
EC
OTracking stock
Divestitures
Spin offs
EC
OTracking stock
Divestitures
Spin offs
Divestitures
Tracking stock
EC
Os
Trackingstock
Spin offs
EC
O