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MeasuresofDividendPolicy
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¨ DividendPayout=Dividends/NetIncome¤ Measuresthepercentageofearningsthatthecompanypaysindividends
¤ Ifthenetincomeisnegative,thepayoutratiocannotbecomputed.
¨ DividendYield=Dividendspershare/Stockprice¤ Measuresthereturnthataninvestorcanmakefromdividendsalone
¤ Becomespartoftheexpectedreturnontheinvestment.
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DividendPayoutRatio:January2016
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0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
<10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90-100% >100%
DividendPayoutRatio:USandGlobal
US
Global
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DividendYields:January2016
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0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
<.5% .5-1% 1-1.5% 1.5-2% 2-2.5% 2.5-3% 3-3.5% 3.5-4% 4-4.5% 4.5-5% 5-5.5% 5.5-6% 6-6.6% 6.5-7% 7-7.5% 7/5-8% >8%
DividendYields:USandGlobalCompanies
US
Global
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DividendYieldsandPayoutRatios:GrowthClasses
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0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
0-3% 3-5% 5-10% 10-15% 15-20% 20-25% >25%
DividendYieldsandPayoutRatios:ByGrowthClass
DividendPayoutratio
DividendYield
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DividendPolicy:Disney,Vale,TataMotors,Baidu andDeutscheBank
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Disney Vale Tata Motors Baidu Deutsche Bank Dividend Yield - Last 12 months 1.09% 6.56% 1.31% 0.00% 1.96% Dividend Payout ratio - Last 12 months 21.58% 113.45% 16.09% 0.00% 362.63% Dividend Yield - 2008-2012 1.17% 4.01% 1.82% 0.00% 3.14% Dividend Payout - 2008-2012 17.11% 37.69% 15.53% 0.00% 37.39%
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ThreeSchoolsOfThoughtOnDividends
1. Iftherearenotaxdisadvantagesassociatedwithdividends& companiescanissuestock,atnoissuancecost,toraiseequity,wheneverneeded
Dividendsdonotmatter,anddividendpolicydoesnotaffectvalue.
2. Ifdividendscreateataxdisadvantageforinvestors(relativetocapitalgains)
Dividendsarebad,andincreasingdividendswill reducevalue3. Ifdividendscreateataxadvantageforinvestors
(relativetocapitalgains)and/orstockholderslikedividends
Dividendsaregood,andincreasingdividendswillincreasevalue
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Thebalancedviewpoint
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¨ Ifacompanyhasexcesscash,andfewgoodinvestmentopportunities(NPV>0), returningmoneytostockholders(dividendsorstockrepurchases)isgood.
¨ Ifacompanydoesnothaveexcesscash,and/orhasseveralgoodinvestmentopportunities(NPV>0),returningmoneytostockholders(dividendsorstockrepurchases)isbad.
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TheDividendsdon’tmatterschoolTheMillerModiglianiHypothesis
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¨ TheMiller-ModiglianiHypothesis:Dividendsdonotaffectvalue¨ Basis:
¤ Ifafirm'sinvestmentpolicies(andhencecashflows)don'tchange,thevalueofthefirmcannotchangeasitchangesdividends.
¤ Ifafirmpaysmoreindividends,itwillhavetoissuenewequitytofundthesameprojects.Bydoingso,itwillreduceexpectedpriceappreciationonthestockbutitwillbeoffsetbyahigherdividendyield.
¤ Ifweignorepersonaltaxes,investorshavetobeindifferenttoreceivingeitherdividendsorcapitalgains.
¨ UnderlyingAssumptions:(a)Therearenotaxdifferencestoinvestorsbetweendividendsandcapitalgains.(b)Ifcompaniespaytoomuchincash,theycanissuenewstock,withnoflotationcostsorsignalingconsequences,toreplacethiscash.(c)Ifcompaniespaytoolittleindividends,theydonotusetheexcesscashforbadprojectsoracquisitions.
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II.TheDividendsare“bad” school:Andtheevidencetobackthemup…
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0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
191619181920192219241926192819301932193419361938194019421944194619481950195219541956195819601962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010201120132015
Figure10.10:TaxratesonDividendsandCapitalGains- US
Dividendtaxrate Capitalgainstaxrate
Difference betweendividendtaxrate&capitalgainspeaksat66%in1950s.
Dividends&capital gainstaxedatsameratesince2003.
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Whatdoinvestorsinyourstockthinkaboutdividends?Cluesontheex-dividendday!
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¨ Assumethatyouaretheownerofastockthatisapproachinganex-dividenddayandyouknowthatdollardividendwithcertainty.Inaddition,assumethatyouhaveownedthestockforseveralyears.
P=Priceatwhichyouboughtthestocka“while” backPb=Pricebeforethestockgoesex-dividendPa=Priceafterthestockgoesex-dividendD=Dividendsdeclaredonstockto,tcg =Taxespaidonordinaryincomeandcapitalgainsrespectively
Ex-dividend day
Dividend = $ D
Initial buyAt $P
Pb Pa
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CashflowsfromSellingaroundEx-DividendDay
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¨ Thecashflowsfromsellingbeforeex-dividenddayare:Pb - (Pb - P)tcg
¨ Thecashflowsfromsellingafterex-dividenddayare:Pa - (Pa - P)tcg +D(1-to)
¨ Sincetheaverageinvestorshouldbeindifferentbetweensellingbeforetheex-dividenddayandsellingaftertheex-dividendday-Pb - (Pb - P)tcg =Pa - (Pa - P)tcg +D(1-to)
¨ Somebasicalgebraleadsustothefollowing:
€
Pb −PaD
=1− to1− tcg
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IntuitiveImplications
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¨ Therelationshipbetweenthepricechangeontheex-dividenddayandthedollardividendwillbedeterminedbythedifferencebetweenthetaxrateondividendsandthetaxrateoncapitalgainsforthetypicalinvestorinthestock.
Tax Rates Ex-dividend day behavior
If dividends and capital gains are taxed equally
Price change = Dividend
If dividends are taxed at a higher rate than capital gains
Price change < Dividend
If dividends are taxed at a lower rate than capital gains
Price change > Dividend
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Theempiricalevidence…
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•Ordinarytaxrate=70%•Capitalgainsrate=28%•Pricechangeas%ofDividend=78%
1966-1969
•Ordinarytaxrate=50%•Capitalgainsrate=20%•Pricechangeas%ofDividend=85%
1981-1985
•Ordinarytaxrate=28%•Capitalgainsrate=28%•Pricechangeas%ofDividend=90%
1986-1990
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DividendArbitrage
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¨ Assumethatyouareataxexemptinvestor,andthatyouknowthatthepricedropontheex-dividenddayisonly90%ofthedividend.Howwouldyouexploitthisdifferential?a. Investinthestockforthelongtermb. Sellshortthedaybeforetheex-dividendday,buyonthe
ex-dividenddayc. Buyjustbeforetheex-dividendday,andsellafter.d. ______________________________________________
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Exampleofdividendcapturestrategywithtaxfactors
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¨ XYZcompanyissellingfor$50atcloseoftradingMay3.OnMay4,XYZgoesex-dividend;thedividendamountis$1.Thepricedrop(frompastexaminationofthedata)isonly90%ofthedividendamount.
¨ Thetransactionsneededbyatax-exemptU.S.pensionfundforthearbitrageareasfollows:¤ 1.Buy1millionsharesofXYZstockcum-dividendat$50/share.¤ 2.Waittillstockgoesex-dividend;Sellstockfor$49.10/share(50- 1*0.90)
¤ 3.Collectdividendonstock.¨ Netprofit=- 50million+49.10million+1million=$0.10million
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Twobadreasonsforpayingdividends1.Thebirdinthehandfallacy
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¨ Argument:Dividendsnowaremorecertainthancapitalgainslater.Hencedividendsaremorevaluablethancapitalgains.Stocksthatpaydividendswillthereforebemorehighlyvaluedthanstocksthatdonot.
¨ Counter:Theappropriatecomparisonshouldbebetweendividendstodayandpriceappreciationtoday.Thestockpricedropsontheex-dividendday.
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2.Wehaveexcesscashthisyear…
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¨ Argument:Thefirmhasexcesscashonitshandsthisyear,noinvestmentprojectsthisyearandwantstogivethemoneybacktostockholders.
¨ Counter:Sowhynotjustrepurchasestock?Ifthisisaone-timephenomenon,thefirmhastoconsiderfuturefinancingneeds.Thecostofraisingnewfinancinginfutureyears,especiallybyissuingnewequity,canbestaggering.
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TheCostofRaisingCapital
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0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Under $1 mil $1.0-1.9 mil $2.0-4.9 mil $5.0-$9.9 mil $10-19.9 mil $20-49.9 mil $50 mil and over
Cos
t as
% o
f fun
ds ra
ised
Size of Issue
Figure 10.12: Issuance Costs for Stocks and Bonds
Cost of Issuing bonds Cost of Issuing Common Stock