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1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica • Circumstances and decisions 3. Other Important Issues • Clienteles • Growth opportunities • Signals • Smoothing • Taxes • Share repurchases Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014 Introduction Dividend policy is not a ‘number‐crunching’ topic This implies that solutions/decisions are much more open to interpretation than in previous cases Dividend policy is the issue we know the least in Corporate Finance An optimal policy may be difficult to determine • There are good reasons to pay/avoid dividends • Some investors want/avoid dividends Ideally, what is the optimal dividend policy? • DPR such that the share price is maximized DPR for which investors are willing to pay the most • But there is no model to determine such DPR
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Page 1: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

1

CorporateFinanceDividendPolicy

JavierEstradaSpring,2014

1.Introduction• Limitationsoftheanalysis

2.ConEd&Telefónica• Circumstancesanddecisions

3.OtherImportantIssues• Clienteles• Growthopportunities• Signals• Smoothing• Taxes• Sharerepurchases

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

IntroductionDividendpolicyisnota‘number‐crunching’topic Thisimpliesthatsolutions/decisionsaremuchmoreopentointerpretationthaninpreviouscases

Dividendpolicyistheissueweknowtheleast inCorporateFinance Anoptimalpolicymaybedifficulttodetermine

• Therearegoodreasonstopay/avoiddividends• Someinvestorswant/avoiddividends

Ideally,whatistheoptimaldividendpolicy?• DPRsuchthatthesharepriceismaximizedDPRforwhichinvestorsarewillingtopaythemost

• ButthereisnomodeltodeterminesuchDPR

Page 2: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

2

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

IntroductionWhatwedoknow Basictrade‐off

• Reinvestingv.Payingout Empiricalregularities

• Dividendsmoothing• Relationshipbetweendividendyieldandincome

Relevantvariablestoconsider• Environment(Macro/Industry/Company)• Clienteles(Whatdoshareholderswant/expect?)• Growthopportunities(Thecriticaltrade‐off)• Signals(Theimplicitmessageconveyed)• Dividendhistory(Smoothing)• Taxes

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesClienteles Companiescanusetheirdividendpolicyto…

• please theirclientele• target aclientele(Telefónica)

Critical(cash)trade‐off Reinvesting(andgrowing) Payingout Go

Page 3: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

3

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesSignalsWhatinformationdoesmanagementconveywithitsdividendpolicy?• ConEd Thecompanyisindeeptrouble(Thestockpricetanked)

• Telefónica Thecompanyhasgreatgrowthopportunities(Thestockpricesoared)

• Moregenerally Go

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesSmoothing Dividendsaresticky(lessvolatilethanearnings) Go

Model(Lintner)• DPSt =α⋅(TDPR)(EPSt)+(1–α)⋅DPSt‐1 TDPR:Targetdividendpayoutratio α:Adjustmentrate

• Notethat… ifα=0⇒ DPSt =DPSt‐1(Dividendsareconstant) ifα=1⇒ DPSt =(TDPR)(EPSt‐1)(DividendsarejustasvolatileasEPS)

• Empirically,LintnerfoundTDPR=50%andα=0.3DPSt =(0.15)⋅EPSt +(0.7)⋅DPStHencesmoothingissubstantial

Page 4: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

4

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesTaxes Dividendsareusuallytaxedatthepersonaltaxrate

• Forwealthyindividualsthepersonaltaxratetypicallyismuchhigherthanthecapitalgainstaxrate Go

Dividendsversussharerepurchases Asdiscussed,dividendstendtobesmoothed Buybacksarefarmorevolatile/unpredictable Go

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Appendix

Page 5: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

5

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

CriticalTrade‐Off

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

CriticalTrade‐Off

Back

Page 6: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

6

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

Page 7: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

7

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

Page 8: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

8

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

Page 9: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

9

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

Back

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Smoothing

Back

Page 10: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

10

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

Page 11: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

11

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

Back

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

Page 12: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

12

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

Page 13: Corporate Finance Dividend Policy · 2019-05-07 · 1 Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction • Limitations of the analysis 2. ConEd & Telefónica

13

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

Back


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