7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 1/29
Dividend Policy and
Stock Price
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 2/29
Stock Return Has Two Components
Dividend Yield(% Gained
FromDividend
Cash Flow)
Capital Gain
Yield (% thatstock grows)
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 3/29
The firm uses earnings plus the additionalfinancing that the increased equity can support to
finance any expected positive-NPV projects.
Any unused earnings are paid out in the form ofdividends. This describes a passive dividendpolicy.
Can the payment of cash dividends affectshareholder wealth?
If so, what dividend-payout ratio willmaximize shareholder wealth?
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 4/29
Ir relevance of Div idends
M&M contend that the effect of dividendpayments on shareholder wealth isexactly offset by other means offinancing.
The dividend plus the “new” stock price
exactly equals the stock price prior to thedividend distribution.
A. Current dividends versus retentionof earnings
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 5/29
Ir relevance of Div idends
M&M and the total-value principle ensures
that the sum of market value plus currentdividends of two firms identical in allrespects other than dividend-payout ratioswill be the same.
Investors can “create” any dividend policythey desire by selling shares when thedividend payout is too low or buying shareswhen the dividend payout is excessive.
B. Conservation of value
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 6/29
Relevance o f Div idends
Uncertainty surrounding future company
profitability leads certain investors toprefer the certainty of current dividends.
Investors prefer “large” dividends.
Investors do not like to manufacture“homemade” dividends, but prefer the
company to distribute them directly.
A. Preference for dividends
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 7/29
Relevance o f Div idends
Capital gains taxes are deferred until the
actual sale of stock. This creates a timingoption.
Capital gains are preferred to dividends,everything else equal. Thus, high dividend-
yielding stocks should sell at a discount togenerate a higher before-tax rate of return.
Certain institutional investors pay no tax.
B. Taxes on the investor
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 8/29
Relevance o f Div idends
Corporations can typically exclude 70% of dividend
income from taxation. Thus, corporations generallyprefer to receive dividends rather than capital gains.
The result is clienteles of investors with differentdividend preferences. In equilibrium, there will be
the proper distribution of firms with differingdividend policies to exactly meet the needs ofinvestors.
Thus, dividend-payout decisions are irrelevant.
B. Taxes on the investor (continued)
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 9/29
Implications of 3 Theories for Managers
Theory Implication
Irrelevance Any payout OK
Bird-in-the-hand Set high payout
Tax preference Set low payout
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 10/29
Other Dividend Issues
Flotation costs
Transaction costs anddivisibility of securities
Institutional restrictions Financial signaling
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 11/29
Empir ical Tes t ing
of Div idend Pol icy
Tax Effect
Dividends are taxed more heavily (in PV terms) thancapital gains, so before-tax returns should be higherfor high-dividend-paying firms.
Empirical results are mixed -- recently the evidenceis largely consistent with dividend neutrality.
Financial SignalingExpect that increases (decreases) in dividends lead
to positive (negative) excess stock returns.
Empirical results are consistent with these
expectations.
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 12/29
Impl icat ions for
Corpo rate Po l icy
Establish a policy that will maximizeshareholder wealth.
Distribute excess funds to shareholdersand stabilize the absolute amount ofdividends if necessary (passive).
Payouts greater than excess fundsshould occur only in an environmentthat has a net preference for dividends.
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 13/29
Impl icat ions for
Corpo rate Po l icy
There is a positive value associatedwith a modest dividend. Could be due
to institutional restrictions orsignaling effects.
Dividends in excess of the passive
policy does not appear to lead toshare price improvement because oftaxes and flotation costs.
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 14/29
Facto rs In f luencing
Dividend Pol icy
Funding Needs of the Firm
Liquidity
Ability to Borrow
Restrictions in Debt Contracts(protective covenants)
Control
Legal Rules
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 15/29
Factors Affecting Payout
PolicySignaling
Agency ProblemsTaxes
Capital Structure AdjustmentsExcess Cash Flow
Provide Liquidity
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 16/29
Dividend Stab i l ity
Stability -- maintaining the position of the firm’s
dividend payments in relation to a trend line.
D o l l a r s P
e r S h a r e
3
4
2
1
Earnings per share
Dividendsper share
Time
50% of earningspaid out as dividends
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 17/29
Dividend Stab i l ity
Dividends begin at 50% of earnings, but are stable andincrease only when supported by growth in earnings.
D o l l a r s P
e r S h a r e
3
4
2
1
Earnings per share
Dividends per share
Time
50% dividend-payoutrate with stability
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 18/29
Valuat ion o f
Dividend Stab i l ity
Information content -- management may be able toaffect the expectations of investors through theinformational content of dividends. A stable dividend
suggests that the company expects stable orgrowing dividends in the future.
Current income desires -- some investors who desirea specific periodic income will prefer a company withstable dividends to one with unstable dividends.
Institutional considerations -- a stable dividend maypermit certain institutional investors to buy thecommon stock as they meet the requirements to beplaced on the organizations “approved list.”
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 19/29
What’s the “residual
distribution model”?
Find the reinvested earnings
needed for the capital budget.Pay out any leftover earnings
(the residual).
This policy minimizes flotationand equity signaling costs,hence minimizes the WACC.
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 20/29
Using the Residual Model to CalculateDistributions Paid
Distr. = – .Net
incomeTargetequityratio
Totalcapitalbudget[ ]))((
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 21/29
Case-1-
Driver Corporation has plans calling for a capitalbudget of $60 million. Its optimal capitalstructure is 60 percent equity and 40 percentdebt. Its earnings before interest and taxes
(EBIT) were $98 million for the year. The firm has$200 million in assets, pays an average of 10percent on all its debt, and faces a marginal taxrate of 35 percent. If the firm maintains a residualdistribution policy (with all distributions in theform of dividends) and will keep its optimalcapital structure intact, what will be the amount ofthe dividends it pays out after financing its capitalbudget?
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 22/29
Calculate interest cost:
Total assets = $200M; 40% debt $200M = $80 million in debt.
Interest cost = $80M 0.10 = $8.0 million.
Calculate net income (in millions):
EBIT $98.0
less: Interest - 8.0EBT $90.0
less: Taxes (@35%) - 31.5
Net income $58.5
The portion of projects financed with retained earnings:
Capital budget calls for $60 million in positive NPV projects.
Retained earnings portion: $60M * 0.60 = $36.0 millionDebt portion: $60M * 0.40 = $24.0 million
Calculate residual available for dividends:
$58.5M - $36.0M = $22.5 million in dividends.
The dividends payout ratio=38%
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 23/29
اى
ت رح
اى
رح
اننت
انت
يز
اد
زت
:ذو
نهأذ
سهن
هت
ت
نت
ذ
طا
ه
انظ
نهزت
نا
انت
م
مغنا ثا ذ وذ ي /ذأهن وسنا م
نا ل ب ذو ز
ا
ت
نا
انارئ
ث
م
نغت
هشو
ي
ز
ي
. رح ي زة
ي ج ت س يذرت ه ص يث
ا انزت
ننك
نت
ذ
نا
انض
يارد
ي
اى
هين
يغزة
س
يت
اى
د.
ى
نا
ن
ن
ز
نى
ت
نا
ارح
ز
ع
نا
ذر
انزت
انق
انو
ا
.ز
د حرا ي ذ/ ذ ى س يغزة
نا ز ه ص يارد انض
.إن خز
و
ي
هف
اى
ت رح
.
اد
23
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 24/29
س
ل-صز
زوت
مخزدت
ا را ثؼسح ت
ئل ج"وج
ز
-
ل"رأ غسح زوت
ا ػ الخزا إارة
الغ مت
8.25ذ
ا
ػ حسؼث
ى
246.493
مخزدت
ا خسؼث
ا
ؼ
ا ب
27.388ةراا
ىآة
13.643
ذ
مر
ل طخدا ىح ح
15.147
.
زوت
ي
ػأ
ئخ
ج"أظزث
ز
-
ل"ػ
ؼي2008ي
زوت
ا
رأ
ص
9.6%ارحع
لر ر ص ج
د302.949رل ر ت
رم
276.447
ػ
2007.
ع
ا ر
ا زوت
ا ي
أر
300
ػ ػس
30ت
ا ت
م
10ث
دا
ا
.
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 25/29
م ت حول د خ ةي رص ةك رش
نب وم
وأتوز
ا
ت
زار
خا
ي
ذ
ا
ث
زت
ا
زوت
ا
أ
إ
زا
ك
ا
لأ
ؼث
ى
ت
م
ا
خزة
ا
ي
خسؼت
ا
ذ
حسغ خ و
100%خسغ
ا ت
ا ج
ا ل را
ذ
خ
خز75%از
ػ ذت
ا خ ل ت
ا را
.حخدا
ػ
ذي
ن
ا
ػ
غ
حخض
زوت
ا
أ
إ
أر
ػ ت ي
خ
ا
2009مرة
ا ىخ ت
ذ
ا زف
ا غ
ى
خػا زوت
ا
ػ
اش
ى
خ
ؼأ ن
ا الخزاض
ػ
حؼح
خ
احت
ا
را
ػ.ػ
ي
ػأ
ئخ
أ
إ
أر
ػ
2008
أوز
از
زغ
ا
ئخ
ث
و
ذ
ا
حلؼث
لج
حزاغ.. ظ توز
ذممت
ا
ا ب
حخزاغ أ خز
ا ه
م
ح خ
ا ت
ؼ
ا ت
ا ت
سا ي ب
ذ
ا ق
ا ؼث
ت
س حؤزا لأ أ لع احث ر مػث
ا غ
ػ
زأ
لػث
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 26/29
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 27/29
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 28/29
7/24/2019 Dividend and Stock Price
http://slidepdf.com/reader/full/dividend-and-stock-price 29/29